~~Table of Contents~~UNITED STATES

~~UNITED~~SECURITIES AND ~~STATES~~EXCHANGE COMMISSION

~~SECURITIES~~Washington, D.C. ~~AND EXCHANGE COMMISSION~~ 20549

~~Washington, D.C. 20549~~ Form 10-K

~~FORM 10-K~~(Mark One)

~~(Mark~~x ~~One~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~x Annual report pursuant to section 13 or 15(d) of~~ For the fiscal ~~Securities~~year ~~Exchange~~ended ~~Act~~December of31, ~~1934~~2007

~~For~~¨ ~~the~~TRANSITION ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended~~TO ~~December~~SECTION ~~31,~~13 ~~2004~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨For the transition ~~Transition~~period ~~report~~from ~~pursuant~~N/A to ~~section 13 or 15(d) of the Securities Exchange Act of 1934~~N/A

~~For~~Commission File ~~the~~Number ~~transition period from N/A to N/A~~ 000-25161

~~Commission~~MODTECH HOLDINGS, ~~File No~~INC. ~~000-25161~~

~~MODTECH~~(Exact name ~~HOLDINGS,~~of ~~INC.~~registrant as specified in its charter)

(Exact name of registrant as specified in its charter)

Delaware	33 - 0825386
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2830 Barrett Avenue, Perris, CA	92571
(Address of principal executive offices)	(Zip Code)

Delaware		33-0825386
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(951) 943-4014

2830 Barrett Avenue, Perris, California		92571
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

~~Registrant’s~~Securities ~~telephone~~ registered ~~number,~~pursuant ~~including~~to ~~area code:~~ Section 12(~~951~~b) ~~943-4014~~of the Act:

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	The NASDAQ Stock Market LLC (NASDAQ Global Market)

Securities registered pursuant to Section 12(g) of the Act:

~~Common Stock, $.01 par value~~ None

Indicate by check mark ~~whether~~if the ~~registrant~~Registrant ~~(1)~~is ~~has~~a ~~filed~~well-known ~~all~~seasoned ~~reports~~issuer ~~required~~as ~~to be filed~~defined by in Rule ~~section~~405 ~~13 or 15(d)~~ of the Securities ~~Exchange~~ Act ~~of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days~~. Yes ¨ No x

~~Yes~~Indicate by xcheck Nomark ¨if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark ifwhether ~~disclosure~~the ofRegistrant ~~delinquent~~(1) ~~filers~~has ~~pursuant~~filed toall ~~Item~~reports ~~405~~required ofto be filed ~~Regulation~~by ~~S-K~~Section is13 ~~not~~or ~~contained~~15(d) ~~herein,~~of ~~and~~the ~~will~~Securities ~~not~~Exchange beAct ~~contained,~~of to1934 during the preceding ~~best~~12 ofmonths ~~registrant’s~~(or ~~knowledge,~~for insuch ~~definitive~~shorter ~~proxy~~period ~~or information~~that ~~statements~~the ~~incorporated~~registrant bywas ~~reference~~required to infile ~~Part~~such ~~III~~reports), ofand ~~this~~(2) ~~Form~~has ~~10-K~~been orsubject ~~any~~to ~~amendment~~such tofiling ~~this~~requirements for the ~~Form~~past ~~10-K~~90 days. ¨Yes x No ¨

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~registrant~~of delinquent filers pursuant to Item 405 of Regulation S-K is annot ~~accelerated~~contained ~~filer~~herein, ~~(as~~and ~~defined~~will not be contained, to the best of the Registrant’s knowledge, in ~~Rule~~definitive proxy or information statements ~~12b-2~~ incorporated by reference in Part III of ~~the~~this ~~Act)~~Form 10-K or any amendment to this Form 10-K. x

~~Yes~~Indicate by xcheck Nomark whether the registrant is a large accelerated filer, an ¨ accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

~~The aggregate market value of the voting stock held by non~~Large accelerated filer ¨ Accelerated filer ¨ Non-~~affiliates of the registrant as of June 30, 2004 was approximately $58,900,000. As of May~~accelerated ~~13, 2005, 14,834,535 shares of registrant’s common stock were outstanding.~~ filer x Smaller reporting company ¨

~~Table~~(Do not check ofif ~~Contents~~a smaller reporting company)

~~PART~~Indicate by Icheck mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~FORWARD~~The aggregate ~~LOOKING~~market ~~STATEMENTS~~value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2007 was approximately $45,000,000.

~~This annual report contains statements which, to the extent that they are not recitations of historical fact, constitute forward-looking statements within the meaning of~~As ~~the Securities Act~~ of ~~1933 and the Securities Exchange Act of 1934. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,”~~ ~~“forecast,”~~ April ~~“may~~11,” ~~“will~~2008,” ~~“should~~21,~~” “continue~~419,”415 ~~“predict”~~shares ~~and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are intended to be subject to the safe harbor protection within the meaning~~ of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this annual report, including the Notes to the Consolidated Financial Statements and in the “Managementregistrant’s ~~Discussion~~common ~~and~~stock ~~Analysis of Financial Condition and~~were ~~Results of Operation,” describe factors, among others, that could contribute to or cause such differences~~ outstanding. The accuracy of such forward looking statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to: the ability to adequately pass through to customers unanticipated future increases in raw material costs; an unanticipated change in the types of classrooms required by school districts; and declines in available funding for modular classroom construction and other risks and uncertainties that are described elsewhere in this report and in our other filings with the Securities and Exchange Commission, including our reports on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, there is no assurance that our expectations will be attained. We will not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

~~ITEM~~DOCUMENTS INCORPORATED 1.BY ~~BUSINESS~~REFERENCE

~~OVERVIEW~~Portions of the Registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders to be filed are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

Modtech ~~Holdings, Inc. (“Modtech”, “we”, “our”, or the “Company”) was founded in 1982 with its initial business consisting of~~ purchasing unfinished and outdated classroom shells and performing installation work. We subsequently changed our business to the design, manufacturing, marketing and installation of classroom and other custom modular projects. We have grown internally and through acquisitions to become one of the premier modular building manufacturers in the country. In February 1999, we merged with SPI Holdings ~~Inc.~~, ~~a Colorado corporation, which designed and manufactured commercial and light industrial modular buildings in Arizona, Texas and California. In March 1999, we acquired Coastal Modular Buildings,~~ Inc. and in March 2001 we acquired Innovative Modular Structures. Both companies were based in central Florida. All of the acquired companies have been fully integrated into Modtech Holdings, Inc. We are a Delaware corporation and maintain our corporate offices in Perris, California, USA.

~~We are a leading provider of modular classrooms in the State of California and a significant provider of commercial and light industrial modular buildings in California,~~Form Nevada, Arizona, New Mexico, Utah, Colorado, Texas, Florida and other neighboring states. We are expanding our classroom offerings in all locations in response to increasing demand for new classroom products. 10-K

~~PUBLIC~~Table of ~~FUNDING~~ contents

Virtually all of our classroom sales are dependant on public funding. Funding initiatives passed by the voters of California have contributed to our growth and success.

		Page #
	PART I

Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	17

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	31
Item 9A.	Controls and Procedures	31
Item 9B.	Other Information	32

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	33
Item 11.	Executive Compensation	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13.	Certain Relationships and Related Transactions, and Director Independence	33
Item 14.	Principal Accountant Fees and Services	33

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	34
Signatures		39
Index to Consolidated Financial Statements		F-1

In 2002, the California legislature approved spending approximately $25 billion on new classroom and school construction. The funding was to come from bond issues to be approved by the voters. Between 2002 and 2004, California voters approved the bond issues. 2

2 PART I

~~Table~~FORWARD LOOKING ~~of Contents~~STATEMENTS

~~Florida~~This annual ~~voters~~report ~~approved~~contains astatements ~~constitutional~~which, ~~amendment~~to inthe ~~2002~~extent tothat ~~address~~they ~~overcrowded~~are ~~public~~not recitations ~~schools~~of historical fact, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The ~~This~~words ~~amendment~~“believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” ~~establishes~~“plan,” ~~statewide~~“outlook,” ~~ceilings~~“forecast,” “may,” “will,” “should,” “continue,” “predict” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are intended to be subject to the safe harbor protection within the meaning of that term in ~~place~~Section by27A ~~2010;~~of 18the ~~students~~Securities Act of ~~per~~1933 ~~classroom~~and Section 21E of the Securities Exchange Act of 1934. Future events and actual results could differ materially from those set forth in, ~~kindergarten~~contemplated by, ~~through~~or ~~third~~underlying ~~grade~~the forward-looking statements. Statements in this annual report, 22including ~~per~~the ~~classroom~~Notes to the Consolidated Financial Statements and in the “Management’s ~~fourth~~Discussion and Analysis of Financial Condition and Results of Operation,” describe factors, among others, that could contribute to or cause such differences. The accuracy of such forward looking statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to: the ability to adequately pass through ~~eighth~~to customers unanticipated future increases in raw material costs; an unanticipated change in the types of classrooms required by school districts; and 25declines ~~per~~in available funding for modular classroom construction and other risks and uncertainties that are described elsewhere in ~~high~~this ~~school~~report and in our other filings with the Securities and Exchange Commission, including our reports on Form 10-Q. AAlthough we ~~number~~believe ofthe ~~counties~~expectations ~~have~~reflected ~~passed~~in ~~sales~~our forward-~~tax~~looking statements are ~~initiatives~~ based toupon ~~fund~~reasonable assumptions, there is no assurance that our expectations will be attained. We will not update these ~~new~~forward-looking ~~classrooms~~statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

~~Further details on historical public~~ITEM ~~funding and relevant legislative actions pertaining to the modular industry can be found in prior Form 10-K filings which are available at www~~ 1.~~modtech.com~~ ~~free of charge.~~ BUSINESS

~~INDUSTRY OVERVIEW~~ Overview

InModtech Holdings, ~~recent~~Inc. ~~years~~(“Modtech”, ~~the~~“we”, ~~growth in population in California~~“our”, ~~both~~or ~~from~~the ~~births~~“Company”) ~~and~~was ~~from~~founded ~~immigration,~~in ~~has~~1982 with ~~led~~its toinitial ~~increasing~~business ~~school~~consisting ~~enrollments.~~of Aspurchasing aunfinished ~~result,~~and ~~classrooms in~~outdated ~~many~~ classroom ~~California~~shells ~~school~~and ~~districts~~performing ~~currently~~installation ~~are~~work. ~~reported~~We tosubsequently bechanged our business ~~among~~to the ~~most~~design, ~~crowded in the nation~~manufacturing, ~~with~~marketing anand ~~average~~installation of 29classroom and ~~students~~other ~~per~~custom ~~class~~modular ~~compared~~projects. toIn aFebruary ~~national~~1999, ~~average~~we ~~class~~merged ~~size~~with ofSPI 17Holdings Inc., ~~Additionally~~a Colorado corporation, ~~changes~~which indesigned ~~population~~and ~~demographics~~manufactured ~~have~~commercial ~~left~~and ~~many~~ light ~~existing~~industrial ~~permanent~~modular ~~school~~buildings ~~facilities~~ in ~~older~~Arizona, ~~residential~~Texas ~~areas~~and ~~with~~California. ~~excess~~In ~~capacity~~March 1999, ~~due~~we toacquired ~~declining~~Coastal ~~enrollments~~Modular Buildings, ~~while~~Inc. ~~many~~and ~~new~~in ~~residential~~March ~~areas~~2001 ~~are~~we ~~faced~~acquired Innovative ~~with~~Modular aStructures. ~~continuing~~Both ~~shortage~~companies ofwere ~~available~~based ~~classrooms.~~in ~~Consequently,~~central itFlorida. All of ~~has~~the ~~become necessary~~acquired tocompanies ~~add~~have ~~additional~~been ~~classrooms~~fully atintegrated ~~many~~into ~~existing~~Modtech ~~facilities~~Holdings, Inc. We are a Delaware corporation and tomaintain ~~build~~our acorporate ~~number~~offices ofin ~~new~~Perris, California, ~~schools~~USA.

~~Both~~We are ~~the~~a leading ~~construction~~provider of ~~new~~modular ~~schools~~classrooms ~~and~~in ~~the~~California ~~addition~~and ofFlorida ~~classrooms~~and ~~at existing schools~~ are ~~tied~~a significant toprovider ~~the~~of ~~sources~~commercial and ~~levels~~light ofindustrial ~~funding~~modular ~~available~~buildings ~~to California school districts. The availability of funding for new~~in ~~school and classroom additions~~ California, ~~in turn~~Florida, ~~is determined in large measure by the amount of tax revenue raised by the State~~Arizona, ~~the~~Nevada ~~level~~and ofother ~~annual~~neighboring ~~allocations~~states. ~~for~~We ~~education~~are ~~from~~also expanding ~~the~~our ~~State’s~~modular ~~budget~~building ~~which~~products isto ~~determined~~include bysingle ~~educational~~family ~~policies~~and ~~that are~~multi-unit ~~subject~~ residences, tomilitary ~~political~~training ~~concerns~~buildings, and ~~the~~concrete ~~willingness~~block ~~of the California electorate to approve state and local bond issues to raise money for school~~ restroom facilities.

~~When compared to the construction of a conventionally built classroom, modular classrooms offer a number of advantages, including, among others:~~ Public Funding

Lower Cost	—	The cost of our standard classroom may be as low as $33,000 installed, as compared to $100,000 to $120,000 for conventional site built construction of a comparable classroom;
Shorter Construction Time	—	A modular classroom can be built and ready for occupancy in a shorter period of time than that needed for state approval and construction of a site built conventional school facility;
Flexibility of Use	—	Modular re-locatable classrooms enable a school district to use the units for short or long-term needs and to move them if necessary to meet shifts in student populations; and
Ease of Financing	—	As personal rather than real property, modular classrooms may be leased on a long or short-term basis from manufacturers and leasing companies. This allows school districts to finance modular classrooms out of both their operating and capital budgets.

Virtually all of our classroom sales are dependent on public funding. Funding initiatives passed by the voters of California have contributed to our growth and success.

~~Our commercial and light industrial~~In ~~building revenues in~~ 2002, the ~~nonresidential~~California ~~modular~~legislature ~~market~~approved ~~have~~spending ~~resulted~~approximately ~~from~~$25 ~~the~~billion ~~wide-spread~~on ~~acceptance~~new classroom ofand ~~modular~~school ~~structures~~construction. asThe anfunding ~~alternative~~was to ~~traditional~~come ~~site~~from ~~construction~~bond ~~and the increasing number of applications for modular buildings across a~~issues ~~broad~~ to be ~~spectrum~~approved ofby ~~industries~~the voters. ~~Because~~Between ~~modular~~2002 ~~buildings~~and ~~are constructed in a factory using an assembly line process~~2004, ~~construction~~California isvoters ~~typically not subject to~~ approved the bond ~~delays caused by weather and site conditions~~issues. ~~Our~~In ~~buildings~~November ~~can,~~2006 ~~therefore,~~the ~~generally be~~State ~~built~~of ~~faster~~California ~~than~~enacted ~~conventional buildings, at~~ a ~~lower~~bond ~~cost and with more consistent quality~~measure of $10.4 ~~Our~~billion ~~buildings~~for ~~can~~educational ~~generally~~facilities ~~be relocated more easily to meet the changing needs of end users~~ and belocal ~~quickly~~agencies ~~joined~~in toCalifornia approved ~~other~~$6.9 ~~modular~~billion ~~buildings~~in tobonds ~~meet~~ for education.

3The State of California is currently experiencing a significant budget deficit, which is expected to negatively impact funding for education.

~~Table~~Florida voters approved a constitutional amendment in 2002 to address overcrowded public schools. This amendment established statewide ceilings to be in place by 2010; 18 students per classroom in kindergarten through third grade, 22 per classroom in fourth through eighth grade and 25 per classroom in high school. A number of counties ~~Contents~~have passed sales-tax initiatives to fund these new classrooms.

increased space requirements. Permanent modular construction has many of the same time saving characteristics as do the relocatable buildings, but can experience the same site delays as conventional construction. 3

~~CALIFORNIA~~Further details ~~MODULAR~~on ~~RELOCATABLE~~certain ~~CLASSROOMS~~historical public funding and legislative actions pertaining to the modular industry can be found in prior Form 10-K filings which are available at www.modtech.com.

~~Our~~Industry California modular re-locatable classrooms are designed, engineered and constructed in accordance with structural and seismic specifications and safety regulations adopted by the California Division of the State Architect, standards which are more rigorous than the requirements for other portable buildings. The Division of the State Architect, which regulates all school construction on public land, has prescribed extensive regulations regarding the design and construction of school facilities, setting minimum qualifications for the preparation of plans and specifications, and reviews all plans for the construction or material modifications to any school building. Construction authorization is not given unless the school district’s architect certifies that a proposed project satisfies construction cost and allowable area standards. We interface with each school district’s architect or engineer to process project specifications through the Division of the State Architect. We believe that the regulated environment in which our classrooms are manufactured serves as a significant barrier to market entry by prospective competitors. See “Business — Competition.” Overview

~~Conventional site built school facilities constructed by school districts using funds from~~In ~~the State Office of Public School Construction typically require two to three~~ recent years ~~for approval and funding. By contrast~~, ~~factory-built~~ school ~~buildings~~enrollments ~~like~~in ~~our~~California ~~standard~~have ~~classrooms~~increased ~~may~~at bea ~~pre-approved~~modest byrate, due to the ~~State~~growth ~~for~~in ~~use~~population in ~~school~~California, ~~construction. Once~~both ~~plans~~from births and ~~specifications~~from ~~for~~immigration. Additionally, achanges ~~given~~in ~~classroom~~population demographics have ~~been~~left ~~pre-approved,~~many existing permanent school ~~districts~~facilities ~~can~~in ~~thereafter~~older ~~include~~residential inareas ~~their~~with ~~application~~excess capacity due to ~~obtain~~declining ~~State~~enrollments, ~~funds~~while ~~for~~many new ~~facilities~~residential aareas ~~notification~~are ~~that~~faced ~~they~~with ~~intend~~a continuing toshortage ~~use~~of ~~pre-approved,~~available ~~standardized factory-built~~ classrooms. ~~This~~Although ~~procedure~~demand ~~reduces~~for ~~the~~new ~~time~~classrooms has ~~required~~slowed, init ~~the~~has ~~State’s~~become ~~approval~~necessary ~~process~~ to asadd ~~little as 90 days, thereby providing an~~ additional ~~incentive to use factory-built relocatable~~ classrooms. Inat ~~all cases, continuous~~many ~~inspection~~ existing ~~by a licensed third party is required during actual manufacture of the classrooms~~facilities, ~~with~~and ~~the school district obligated~~ to ~~hire~~build ~~and~~a ~~pay~~number ~~for~~of ~~such~~new ~~inspection costs~~schools.

~~Our~~Both the construction ~~California~~of ~~classrooms~~new ~~are~~schools ~~manufactured~~ and ~~installed in accordance with~~ the ~~applicable~~addition ~~state~~of ~~building~~classrooms ~~codes~~at ~~and~~existing ~~Department of State~~schools ~~Architect’s~~ are ~~interpretive~~tied ~~regulations,~~to ~~which~~the ~~supersedes~~sources ~~all~~and ~~local~~levels ~~building~~of ~~codes~~funding ~~for~~available ~~purposes~~to ofCalifornia school ~~construction~~ districts. The ~~classrooms~~availability ~~must~~of ~~comply~~funding ~~with accessibility requirements~~ for ~~the~~new ~~handicapped,~~school ~~structural,~~ and ~~seismic~~classroom ~~and fire code~~additions, ~~requirements.~~ in ~~We manufacture and install standard~~turn, ~~largely~~is ~~pre-fabricated~~determined ~~modular re-locatable classrooms, as well as customized classrooms, which are modular~~ in ~~design,~~large ~~but~~measure ~~assembled~~by ~~on-site~~the ~~using~~amount ~~components~~of ~~manufactured~~tax ~~internally~~revenue ~~together with~~raised ~~components~~ by the ~~purchased~~State, ~~from~~the ~~third~~level ~~party~~of ~~suppliers.~~annual ~~Our~~allocations ~~classrooms~~for ~~vary~~education ~~in size~~ from ~~two~~the ~~modular~~State’s ~~units~~budget which ~~containing~~is adetermined ~~total~~by ofeducational ~~960~~policies ~~square feet to 20 units~~ that ~~can~~are besubject ~~joined together~~ to ~~produce a facility comprising 9~~political factors,~~600~~ ~~square~~and ~~feet.~~the ~~Larger configurations~~willingness ~~are~~of ~~also~~the ~~possible.~~California ~~Typical~~electorate ~~prices~~to ~~for~~approve ~~our~~state and local ~~standard~~bond ~~classrooms~~issues ~~range from $33,000~~ to ~~$37,000,~~raise ~~while~~money ~~prices~~ for aschool ~~custom classroom generally exceed $50,000, depending upon the extent of customization required~~facilities.

~~The two basic structural designs for standard and custom modular classrooms are a rigid frame~~When ~~structure~~ compared ~~and a shear wall structure. The rigid frame structure uses a steel floor and roof system, supported at each corner with square steel tubing. These buildings have curtain walls~~ to ~~enclose~~ the ~~interior~~construction ~~from the outside, and have the advantage~~ of ~~unlimited width and length. Rigid frame structures may be used for multipurpose rooms and physical education buildings as well as standard classrooms. Shear wall classrooms have~~ a ~~maximum~~conventionally ~~width of 48 feet (four 12-foot modules) and a maximum length of 60 feet. These classrooms use the exterior and interior walls to produce the required structural strength and can be~~ built ~~at lower costs than rigid frame structures. Our most popular factory-built~~ classroom, ~~is a rigid frame~~modular ~~design,~~ classrooms ~~with~~offer ~~two modules connected side by side to complete~~ a 24number byof ~~40-foot~~advantages, ~~classroom.~~including, among others:

Custom built classrooms, libraries and gymnasiums contain design variations and dimensions such as ceiling height, roof pitch, overall size and interior configuration. These units typically are not assembled at the factory but instead are shipped in pieces, including floors, walls and roofs, and assembled on-site. Contracts for custom-built units may include the design, engineering and layout for an entire school or an addition to a school, and

Lower Cost	—	The cost of our standard modular classroom may be as much as 50% lower than conventional site built construction of a comparable classroom;

Shorter Construction Time	—	A modular classroom can be built and ready for occupancy in a shorter period of time than is needed for state approval and construction of a site built conventional school facility;

Flexibility of Use	—	Modular relocatable classrooms enable a school district to use the units for short or long-term needs and to move them if necessary to meet shifts in student populations; and

Ease of Financing	—	As personal rather than real property, modular classrooms may be leased on a long or short-term basis from manufacturers and leasing companies. This allows school districts to finance modular classrooms out of both their operating and capital budgets.

4Our commercial and light industrial building revenues in the nonresidential modular market have resulted from the wide-spread acceptance of modular structures as an alternative to traditional site construction and the increasing number of applications for modular buildings across a broad spectrum of industries. Because modular buildings are constructed in a factory using an assembly line process, construction is typically not subject to the delays caused by weather and site conditions. Our buildings can, therefore, generally be built faster than conventional buildings, at a lower cost and with more consistent quality. Our buildings can generally be relocated more easily to meet the changing needs of end users and be quickly joined to other modular buildings to meet increased space requirements. Permanent modular construction has many of the same time saving characteristics as do the relocatable buildings, but can experience the same site delays as conventional construction.

~~Table~~California Modular ofRelocatable ~~Contents~~Classrooms

Our ~~involve~~ California ~~site~~modular ~~preparation~~relocatable classrooms are designed, ~~grading~~engineered and constructed in accordance with structural and seismic specifications and safety regulations adopted by the California Division of the State Architect (DSA), standards ~~concrete~~which are more rigorous than the requirements for other portable buildings. The Division of the State Architect, which regulates all school construction on public land, has prescribed extensive regulations regarding the design and ~~asphalt~~construction ~~work~~of school facilities, setting minimum qualifications for the preparation of plans and ~~landscaping~~specifications, and reviews all plans for the construction or material modifications to any school building. ~~Customized~~Construction authorization ~~classrooms~~is ~~are~~not ~~generally~~given ~~more~~unless ~~expensive~~the school district’s architect certifies that a proposed project satisfies construction cost and ~~take~~allowable ~~longer~~area standards. We interface with each school district’s architect or engineer to ~~complete~~process project ~~than~~ specifications ~~standard~~through the Division of the State Architect. We believe that the regulated environment in which our California classrooms are manufactured serves as a significant barrier to market entry by prospective competitors. See “Business — Competition.”

~~Additionally,~~Conventional site webuilt ~~have~~school ~~developed~~facilities ~~and~~constructed ~~manufactured~~by school districts using funds from the California State Office of Public School Construction typically require two~~-story~~ to ~~modular~~three ~~classroom~~years ~~buildings~~for approval and funding. ABy ~~two~~contrast, factory-~~story~~built ~~complex~~school buildings like our standard classrooms may ~~include~~be ~~cantilevered~~pre-approved ~~balconies,~~by ~~soffits,~~the ~~parapets~~DSA ~~and~~for ~~mansards~~use in school construction. ~~They~~Once ~~typically~~plans and specifications for a given classroom have been pre-approved, school districts can thereafter include in their application to obtain State funds for new facilities a ~~modular~~notification ~~elevator~~that ~~system~~they intend to use pre-approved, standardized factory-built classrooms. This procedure reduces the time required in the DSA approval process to as ~~well~~little as ~~stairways.~~90 ~~Our~~days, ~~two~~thereby providing an additional incentive to use factory-~~story~~built ~~structures~~relocatable ~~offer~~classrooms. In all cases, continuous inspection by a ~~variety~~licensed ~~of material~~third ~~and~~party ~~design~~is ~~options~~required ~~such~~during actual asmanufacture ~~stucco,~~of ~~brick~~the ~~veneer~~classrooms, ~~fiber~~with ~~cement~~the ~~panels~~school ordistrict ~~traditional~~obligated ~~wood~~to hire and ~~siding.~~pay for such inspection costs.

The interior and exterior of all of our modular classrooms can be customized by employing different materials, design features and floor plans. Most classrooms are open, but the interior of the buildings can be divided into individual rooms by permanent or re-locatable partitions. The floor covering is usually carpet but may be sheet vinyl or ceramic tile depending upon the intended use of the classroom. Interior wall material is usually vinyl covered firtex over gypsum board, while other finishes such as porcelain enamel or painted hardboard may be used in such places as restrooms and laboratories. Electrical wiring, air conditioning, windows, doors, fire sprinklers and plumbing are installed during the manufacturing process. The exterior of the units is typically plywood siding, painted to the customer’s specifications, but other common exterior finishes may also be applied. 4

~~CUSTOMERS~~Our California classrooms are manufactured and installed in accordance with applicable state building codes and DSA interpretive regulations, which supersede all local building codes for purposes of school construction. The classrooms must comply with accessibility requirements for the handicapped, structural, and seismic and fire code requirements. We manufacture and install standard, largely pre-fabricated modular relocatable classrooms, as well as customized classrooms, which are modular in design, but assembled on-site using components manufactured internally together with components purchased from third party suppliers. Our school facilities vary in size from two modular units containing a total of 960 square feet to complete campuses of 50,000 square feet and larger. Typical prices for our standard classrooms range from $40.00 per square foot to $70.00 per square foot, depending upon the extent of customization required and our scope of work.

InThe two basic ~~California,~~structural wedesigns ~~market~~for standard and ~~sell~~custom ~~our~~ modular classrooms ~~primarily~~are toa ~~school~~rigid frame ~~districts.~~structure ~~We also~~and ~~sell~~a ~~our~~shear ~~classrooms~~wall tostructure. ~~the~~The ~~State~~rigid offrame ~~California~~structure uses a steel floor and ~~leasing~~roof ~~companies~~system, ~~both~~supported ofat ~~which~~each ~~lease~~corner ~~the~~with ~~classrooms~~square ~~principally~~steel ~~to school districts~~tubing. These ~~Sales~~buildings ofhave ~~classrooms~~curtain walls to ~~California~~enclose ~~school~~the ~~districts~~interior from the outside, and have the ~~State~~advantage of ~~California~~unlimited width and ~~leasing~~length. ~~companies~~Rigid frame structures may ~~accounted~~ be used for ~~51.1%,~~multipurpose ~~64.6%~~rooms and ~~58.1%~~physical ofeducation ~~our~~buildings ~~total~~as ~~net~~well ~~sales~~as ~~for~~standard classrooms. ~~the~~Shear ~~years~~wall ~~ended~~classrooms ~~December~~have ~~31,~~a ~~2004,~~maximum ~~2003~~width of 48 feet (four 12-foot modules) and ~~2002,~~a ~~respectively.~~maximum ~~Our~~length ~~customers~~of ~~typically~~60 ~~pay~~feet. ~~cash~~These ~~from~~classrooms ~~general~~use ~~operating~~the ~~funds~~exterior and interior orwalls to produce the ~~proceeds~~required ofstructural ~~local~~strength ~~bond~~and ~~issues,~~can orbe ~~lease~~built at lower ~~classrooms~~costs than rigid frame structures. Our most popular factory-built ~~through~~ classroom ~~banks~~is a rigid frame design, ~~leasing~~with ~~companies~~two ~~and~~modules ~~other~~connected ~~private~~side ~~funding~~by ~~sources.~~side to complete a 24 by 40-foot classroom.

~~Sales of~~Custom ~~classrooms~~ built ~~to individual California school districts accounted for approximately 48.4%~~classrooms, ~~52.4%~~libraries and ~~47.2%,~~gymnasiums ofcontain ~~our~~design ~~net~~variations ~~sales during the years ended December 31, 2004, 2003~~ and ~~2002, respectively, with sales of classrooms to third-party lessors to~~ ~~California~~ dimensions ~~school~~such ~~districts~~as ~~during~~ceiling ~~these periods accounting for approximately 2.0%~~height, ~~9.8%~~roof ~~and 4.5%~~pitch, ~~respectively,~~overall ofsize ~~our~~and ~~net sales~~interior configuration. ~~The~~These ~~mix~~units oftypically ~~school~~are ~~districts~~not toassembled ~~which~~at wethe ~~sell~~factory, ~~our products varies somewhat from year to year. Sales of classrooms~~but ~~directly~~ instead toare ~~the~~shipped ~~State~~in ofpieces, ~~California~~including ~~during 2004 represented approximately 0.6% of our net sales~~floors, ~~compared~~walls ~~to approximately 2.5%~~ and ~~6.4%~~roofs, ~~of our 2003~~ and ~~2002 net sales, respectively~~assembled on-site. ~~One~~Contracts offor ~~the third~~custom-~~party~~built ~~lessors~~units tomay ~~which~~include wethe ~~sell~~design, ~~classrooms~~engineering and layout for ~~lease~~ toan ~~California~~entire school ~~districts~~or ~~was~~an ~~affiliated~~addition ~~with us through ownership by one of our former officers until August, 2004. Sales~~ to ~~this~~a ~~affiliate for the seven months ended July 31~~school, ~~2004~~and ~~comprised~~involve ~~approximately 0.8% of the annual net sales.~~site ~~For~~ preparation, ~~the years ended December 31~~grading, ~~2003~~concrete and ~~2002,~~asphalt ~~sales~~work ofand landscaping. Customized classrooms toare ~~this~~generally ~~affiliated~~more ~~leasing~~expensive ~~company comprised approximately 2.0%~~ and ~~3.4%,~~take ~~respectively,~~longer ofto ~~our~~complete ~~net~~than standard ~~sales~~classrooms.

~~We design and build modular buildings to customer specifications for a wide array of uses beyond California classrooms~~Additionally, ~~including~~ ~~governmental,~~ we ~~healthcare,~~have ~~educational,~~developed ~~airport~~ and ~~correctional~~manufactured ~~facilities;~~two-story ~~office~~modular ~~and~~classroom ~~retail~~buildings. ~~space; daycare centers; libraries; churches; construction trailers; golf clubhouses; police stations; convenience stores; fast food restaurants; classrooms~~A ~~and~~ two-story ~~sales~~complex ~~offices.~~may ~~The~~include ~~modular~~cantilevered ~~buildings~~balconies, ~~serve as temporary~~soffits, ~~semi-permanent~~parapets and mansards. ~~permanent~~They ~~facilities~~typically ~~and~~include ~~can~~a ~~function as free-standing buildings or additions to existing structures. These~~ modular ~~buildings~~elevator ~~range~~system inas ~~size~~well ~~and~~as ~~complexity from a basic~~stairways. ~~single-unit~~ Our ~~100~~two-~~square~~story ~~foot~~structures ~~module~~offer to a ~~50,000-square~~variety ~~foot~~of ~~building~~material ~~combining several structures~~ and ~~containing~~design ~~multiple~~options ~~stories.~~such as stucco, Webrick ~~sell our products directly to the end customer in some instances~~veneer, ~~particularly~~fiber ~~for~~cement ~~major~~panels ~~projects.~~or Wetraditional ~~also sell to~~wood ~~and through dealers and distributors~~ siding. ~~In some instances these dealers provide 3rd party financing to the end customer for direct sales.~~

5The interior and exterior of all of our modular classrooms can be customized by employing different materials, design features and floor plans. Most classrooms are open, but the interior of the buildings can be divided into individual rooms by permanent or relocatable partitions. The floor covering is usually carpet, but may be sheet vinyl or ceramic tile depending upon the intended use of the classroom. Interior wall material is usually vinyl covered firtex over gypsum board, while other finishes such as porcelain enamel or painted hardboard may be used in such places as restrooms and laboratories. Electrical wiring, air conditioning, windows, doors, fire sprinklers and plumbing are installed during the manufacturing process. The exterior of the units is typically plywood siding, painted to the customer’s specifications, but other common exterior finishes may also be applied.

~~Table of Contents~~Customers

~~SALES~~In California, ~~AND~~we ~~MARKETING~~market and sell our modular classrooms primarily to school districts. Sales of classrooms to individual California school districts accounted for approximately 49.9%, 39.2% and 45.5% of our net sales during the years ended December 31, 2007, 2006 and 2005, respectively. Sales to Coachella Valley Unified School District in California accounted for 10.2% of our net sales during the year ended December 31, 2007. Sales to St. Lucie County in Florida accounted for 12.5% of our net sales during the year ended December 31, 2006. See Item 1A. “Risk Factors.” The mix of school districts to which we sell our products varies somewhat from year to year. We also sell our classrooms to the State of California and leasing companies, both of which lease the classrooms principally to school districts.

We also design ~~utilize~~and anbuild ~~internal~~modular ~~sales~~buildings ~~force~~to ~~which~~customer ~~focuses~~specifications ~~primarily~~for ona ~~classroom~~wide ~~and~~array of ~~other~~uses ~~major~~beyond ~~project~~California ~~opportunities.~~classrooms, Weincluding ~~rely~~residential, ongovernmental, healthcare, ~~dealers~~educational, airport and correctional facilities; office and retail ~~distributors~~ space; ~~for~~daycare ~~additional~~centers; ~~sales~~libraries; inchurches; ~~all~~construction ~~the~~trailers; ~~markets~~golf clubhouses; wepolice ~~serve.~~stations; ~~Those~~convenience ~~markets~~stores; ~~are~~fast ~~education~~food restaurants; classrooms ~~government~~and ~~(military~~sales offices. The modular buildings serve as temporary, semi-permanent ~~homeland~~and ~~security~~permanent facilities and ~~other~~can ~~agencies);~~function ~~institutional~~as ~~(health~~free-standing buildings ~~care,~~or ~~day~~additions ~~care,~~to ~~correctional);~~existing ~~retail~~structures. ~~(banks,~~These ~~kiosks,~~modular ~~remote~~buildings ~~restrooms,~~range ~~fast~~ in size ~~food,~~and ~~motels~~complexity from a basic single-unit 100-square foot module to a 50,000-square foot building combining several structures and ~~others)~~containing multiple stories. We sell these non-classroom products directly to the end customer in some instances, particularly for major projects. We also sell to and ~~other~~through dealers ~~commercial~~and distributors. In some instances these dealers provide third-party financing to the end customer for direct sales.

Most of our contracts are awarded on an open bid basis. The marketing process for many of our contracts begins prior to the time the bid process begins. After we selects bids or contracts that we desires to pursue, our marketing and engineering personnel interface directly with various school boards, superintendents or architects during the process of formulating bid or contract specifications. We prepare our bids or proposals using various criteria, including current material prices, historical overhead costs and a targeted profit margin. Many of our contracts are “turnkey”; that is, they include engineering and design, manufacturing, transportation and installation. Open bid contracts are normally awarded to the lowest responsible bidder. 5

~~MANUFACTURING AND ON-SITE INSTALLATION~~Sales and Marketing

We utilize ~~use~~ an ~~assembly-line~~internal ~~approach~~sales inforce ~~the~~that ~~manufacture~~focuses ofprimarily ~~our~~on ~~classrooms.~~classroom ~~The~~and other ~~process~~ major ~~begins~~project ~~with the fabrication of the steel floor joists~~opportunities. ~~The~~We ~~floor~~rely ~~joists~~on ~~are~~dealers ~~welded~~and todistributors afor ~~perimeter steel frame to form the floor sub-assembly, which is typically covered by plywood flooring. Concurrent with the floor assembly the roof~~additional ~~structure~~ sales ~~is welded~~ in aall ~~similar fashion with joists and a perimeter frame. The completed roof is then welded to~~ the ~~completed~~markets ~~floor~~we ~~utilizing four tube steel corner posts creating a moment connection~~serve. ~~The~~Those ~~unit~~markets ~~progresses~~are ~~down~~education; ~~the production line~~government ~~with~~ (military, ~~value~~homeland ~~added~~security atand ~~each~~other ~~work~~agencies); ~~station~~institutional ~~with~~(health ~~the installation of walls~~care, day ~~insulation~~care, ~~suspended~~correctional); ~~grid~~residential; ~~ceilings,~~retail ~~electrical systems~~(banks, ~~heating and air conditioning~~kiosks, ~~windows,~~remote ~~doors~~restrooms, ~~plumbing and chalkboards follow, with painting and finishing crews~~ ~~completing~~ fast ~~the process. Once construction of a classroom commences~~food, ~~the building can be completed in as little as three days. The construction of custom units on-site~~motels, ~~from pre-manufactured components, is similar to factory-built units in its progressively-staged assembly process but may involve more extensive structural connections~~ and ~~finish~~others) ~~work depending upon the size~~ and ~~type~~other ~~of building, and typically takes 30 to 60 days to complete~~commercial.

WeMost of our contracts are ~~vertically-integrated~~awarded inon ~~the~~an ~~manufacture~~open ofbid ~~our~~basis. ~~modular~~The ~~classrooms,~~marketing inprocess ~~that~~for wemany ~~fabricate substantially all~~ of our ~~own~~contracts ~~metal~~begins ~~components~~prior atto ~~our~~the ~~facilities,~~time ~~including~~the ~~structural~~bid ~~floor~~process ~~and~~begins. ~~roof~~After ~~joists,~~we select ~~exterior~~bids ~~roof~~or ~~panels,~~contracts ~~gutters,~~that ~~foundation~~we ~~vents,~~desire ~~ramps~~to pursue, ~~stairs~~our marketing and ~~railings.~~engineering personnel Weinterface ~~believe~~directly ~~that~~with ~~the~~various ~~ability~~school toboards, ~~fabricate~~superintendents ~~our own~~or ~~metal~~ architects ~~components~~during ~~helps to reduce~~ the ~~costs~~process of ~~our~~formulating ~~products~~bid ~~and~~or ~~controls~~contract ~~our quality and delivery schedules~~specifications. We prepare ~~maintain~~our abids ~~quality~~or ~~control~~proposals ~~system~~using ~~throughout~~various ~~the~~criteria, ~~manufacturing~~including ~~process~~current material prices, ~~under~~historical ~~the~~overhead ~~supervision~~costs ofand ~~both~~a ~~our~~targeted ~~own~~profit ~~quality~~margin. ~~control~~Many ~~personnel~~of our ~~and~~ contracts ~~independent~~include ~~third~~services ~~party~~such ~~inspectors~~as ~~engaged~~engineering byand ~~our~~design, ~~customers. In addition~~manufacturing, transportation weand ~~track~~installation. ~~the~~Open ~~status~~bid ofcontracts ~~all~~are ~~classrooms~~normally ~~from~~awarded ~~sale~~to the lowest ~~through~~responsible ~~installation and completion~~bidder.

~~Completed classroom units, or components used in customized units, are loaded onto specially designed flatbed trailers for towing by trucks~~Manufacturing ~~to the school site. Upon arrival at the site, the units are structurally connected, components are assembled,~~ and ~~the classroom is installed on its foundation. Connection with utilities is completed in the same manner as in conventional on~~On-site ~~construction.~~ Installation of the modular classrooms may be on a separate foundation, or several units may be incorporated on a common foundation, so that upon installation they appear to be an integral part of an existing school facility or function as a larger building, such as a multi-purpose room or cafeteria.

WeClassroom oversee installation of our classrooms and other buildings on-site, using our own employees for project supervision as the general contractor. In many projects, we supervise subcontracted electrical, plumbing, grading, paving, concrete work, and other site preparation work and services. We have general contractor’s licenses in the states where we engage in activities that require such licenses. Products

InWe use ~~addition~~an assembly-line toapproach ~~approvals~~in bythe manufacture of our classrooms. The process begins with the ~~Division~~fabrication of the ~~State~~steel ~~Architect~~floor joists. The floor joists are welded to a perimeter steel frame to form the floor sub-assembly, ~~licensed~~which ~~inspectors~~is ~~representing~~typically ~~school~~covered by ~~district~~plywood ~~customers~~flooring. ~~are~~Concurrent ~~present~~with the floor assembly, the roof structure is welded in a similar fashion with joists and a perimeter frame. The completed roof is then welded to the completed floor utilizing four tube steel corner posts creating a moment connection. The unit progresses down the production line with value added at each work station with the installation of ~~our~~walls, insulation, ~~California~~suspended grid ceilings, electrical systems, heating and air ~~manufacturing~~ conditioning, ~~facilities~~windows, todoors, ~~continuously~~plumbing ~~inspect~~and chalkboards follow, with painting and finishing crews completing the process. Once construction of a classroom commences, the building can be completed in as little as three days. The construction of custom units on-site, from pre-manufactured components, is similar to factory-built units in its progressively-staged assembly process but may involve more extensive structural connections and finish work depending upon the size and type of building, and, typically takes 30 to 60 days to complete.

6We are vertically integrated in the manufacture of our modular classrooms, in that we fabricate substantially all of our own metal components at our facilities, including structural floor and roof joists, exterior roof panels, gutters, foundation vents, ramps, stairs and railings. We believe that the ability to fabricate our own metal components helps to reduce the costs of our products and controls our quality and delivery schedules. We maintain a quality control system throughout the manufacturing process, under the supervision of both our own quality control personnel and independent third party inspectors engaged by our customers. In addition, we track the status of all classrooms from sale through installation and completion.

~~Table~~Completed classroom units, or components used in customized units, are loaded onto specially designed flatbed trailers for towing by trucks to the school site. Upon arrival at the site, the units are structurally connected, components are assembled, and the classroom is installed on its foundation. Connection with utilities is completed in the same manner as in conventional on-site construction. Installation of ~~Contents~~the modular classrooms may be on a separate foundation, or several units may be incorporated on a common foundation, so that upon installation they appear to be an integral part of an existing school facility or function as a larger building, such as a multi-purpose room or cafeteria.

Historically, we have overseen installation of our classrooms and other buildings on-site, using our own employees for ~~compliance~~project tosupervision as the ~~approved~~general ~~plans~~contractor. In the ~~On-site~~future, ~~inspections~~we ~~after~~will, ~~installation~~in ~~are~~some ~~also~~instances, ~~made~~use bythe ~~independent~~services of third ~~party~~parties ~~inspectors~~to oversee ~~for~~installation ~~purposes of~~work. ~~determining~~In ~~compliance~~many ~~with~~projects, ~~the~~we ~~approved~~supervise ~~plans~~subcontracted electrical, plumbing, grading, paving, concrete work, and ~~all~~other ~~applicable~~site ~~codes~~preparation work and services. We have general contractor licenses in the states where we engage in activities that require such licenses.

WeIn ~~also~~ addition ~~use~~to aapprovals ~~continuous~~by ~~flow~~the ~~assembly~~California ~~line~~Division ~~process~~of ~~for~~the ~~our~~State ~~non-classroom~~Architect, licensed ~~buildings.~~inspectors ~~Multiple~~representing ~~structures~~California ~~are~~school ~~assembled~~district ~~simultaneously~~customers are present at ~~various~~each ~~stations~~of ~~along~~our ~~the~~California ~~assembly~~manufacturing ~~line.~~facilities ~~Depending~~to ~~upon~~continuously inspect the ~~complexity~~construction of ~~the~~classrooms ~~design~~ for aconformity ~~particular~~to ~~modular building,~~ the ~~average~~approved ~~construction~~plans. On-site ~~time~~inspections ~~from~~after ~~approval~~installation ofare ~~the~~also ~~design~~made toby ~~shipment~~independent ~~ranges~~third ~~from~~party inspectors 30for topurposes ~~45 days. Once construction~~ of adetermining ~~typical~~conformity ~~modular~~with ~~building commences,~~ the ~~building~~approved ~~can~~plans beand compliance ~~completed~~with inall asapplicable ~~few as seven to ten days~~codes.

At December 31, 2004, we had six manufacturing facilities. Two are located in Perris, California, which is approximately 60 miles east of Los Angeles. The third facility is in Lathrop, California, which is located approximately 75 miles east of San Francisco. In February 2005, we announced the closure of the Lathrop facility, which was completed on April 30, 2005. This closure is discussed in more detail in ITEM 2 of this report. The fourth manufacturing facility is located in Phoenix, Arizona. We have another facility in Glen Rose, Texas, which is located approximately 75 miles southwest of Dallas. Our sixth manufacturing facility is located in Plant City, Florida, approximately 30 miles northeast of Tampa. 6

~~Our standard contractual warranty for modular buildings is one year, although it may be varied by contract specifications. Purchased equipment installed by us, such as~~Non-Classroom ~~air conditioning units, carries the manufacturers’ standard warranty. Warranty costs have not been material in the past.~~ Products

~~BACKLOG~~We also use a continuous flow assembly line process for our non-classroom buildings. Multiple structures are assembled simultaneously at various stations along the assembly line. Depending upon the complexity of the design for a particular modular building, the average construction time from approval of the design to shipment ranges from 30 to 45 days. Once construction of a typical modular building commences, the building can be completed in as few as seven to ten days.

We manufacture classrooms and other buildings to fill existing orders only, and not for inventory. As of April 30, 2005, the backlog of sales orders was approximately $179.5 million, up from approximately $157.9 million at April 30, 2004. Backlog that will be converted into sales during the current fiscal year is approximately $125.0 million. The rate of booking new contracts varies month to month, and customer changes in delivery schedules occur. For these reasons, among others, our backlog as of any particular date may not be representative of actual sales for any succeeding period. Warranty

~~The~~Our standard ~~backlog~~contractual bywarranty ~~region~~for asmodular ofbuildings ~~April~~is 30one year, ~~2005~~although ~~was~~it may be asvaried ~~follows:~~by ~~California—$139~~contract specifications.4 ~~million;~~Purchased ~~Arizona—$14.2~~equipment ~~million;~~installed ~~Texas—$4.5~~by us, ~~million;~~ such as ~~and~~air ~~Florida—$21.4~~conditioning ~~million~~units, carries the manufacturers’ standard warranty. Warranty costs have not been material in the past.

~~COMPETITION~~ Backlog

~~The~~We manufacture ~~modular~~classrooms ~~re-locatable~~and ~~classroom~~other ~~industry~~buildings isto ~~highly competitive~~fill existing orders only, ~~with~~and not for ~~the~~inventory. ~~market~~As ~~divided~~of ~~among~~February a29, ~~number~~2008, the backlog of ~~privately-owned~~sales ~~companies~~orders ~~whose~~was approximately ~~share~~$73.5 ofmillion, ~~the~~up ~~market~~from isapproximately ~~smaller~~$60.4 ~~than~~million ~~ours~~at February 28, 2007. We ~~believe~~expect ~~that~~to convert substantially the ~~nature~~entire ofbacklog ~~the~~at ~~bidding~~February ~~process~~29, 2008 into ~~the~~sales ~~level~~during fiscal year 2008. The rate of ~~performance~~booking ~~bonding~~new ~~required~~contracts varies from month to month, and ~~the~~customer ~~industry’s regulated~~changes ~~environment~~in ~~serve~~delivery asschedules ~~barriers~~occur. toFor these reasons, ~~market~~among ~~entry~~others, ~~and~~our ~~that~~backlog ~~the~~as ~~expertise~~ of ~~our~~any ~~management~~particular ~~gives~~date usmay annot ~~advantage~~be representative ~~over~~of ~~competitors.~~actual sales for any succeeding period.

WeThe backlog ~~believe~~by ~~that~~region ~~our~~as ~~expertise~~of inFebruary ~~site~~29, ~~preparation~~2008 was as follows: California—$67.3 million; Arizona—$2.0 million; and ~~on-site~~Florida—$4.2 ~~installation~~million. ~~gives~~This uscompares ato ~~competitive~~the following ~~advantage~~backlog ~~over~~by ~~many~~region ~~manufacturers~~as of ~~higher-priced,~~February ~~customized modular units~~28, ~~while~~2007: ~~our~~California—$49.1 ~~vertically~~million; Arizona—$2.5 ~~integrated,~~million; ~~assembly-line~~and ~~approach~~Florida—$8.8 tomillion. ~~manufacturing~~As ~~enables~~of usFebruary to29, be2008, ~~one~~$48.3 million of the ~~low-cost~~total ~~producers~~backlog ofincluded ~~standardized~~signed contracts, ~~modular~~with ~~re-locatable~~the ~~classrooms~~remaining $25.2 million in ~~California.~~letters ~~Unlike many~~ of ~~our~~intent ~~competitors,~~or weother ~~manufacture~~firm ~~most~~purchase ofcommitments ~~our~~which are ~~own~~ pending ~~metal~~final ~~components~~contract ~~which~~approval. ~~allows~~Included usin tothe ~~maintain~~backlog ~~quality~~is ~~control~~$3.4 ~~over~~million ~~these~~of sales ~~components and~~ to ~~produce~~be ~~them~~made atto athe ~~lower~~Lady ~~average~~Lake ~~cost~~Partnership, ~~than that at~~ which ~~they~~is ~~could~~developing bea ~~obtained~~residential housing ~~from~~tract ~~outside~~in ~~sources~~Florida. WeOur ~~also~~President ~~believe~~and ~~that~~Chief ~~the~~Executive ~~quality~~Officer, ~~and~~Dennis Shogren, ~~appearance~~is ofa ~~our buildings,~~trustee and ~~our~~beneficiary ~~reputation~~of ~~for~~one ~~reliability~~of inthe ~~completion~~partners of ~~our~~the ~~contracts,~~partnership. The ~~enable~~sales us to ~~maintain~~Lady aLake ~~favorable~~Partnership ~~position~~have ~~among~~been approved by our ~~competition~~Audit Committee.

As the demand for modular buildings has shifted in recent years from standardized buildings to more complex, customized buildings, we have had to modify our production process and, as a result, have at times experienced competitive disadvantages. Competition

7The modular relocatable classroom industry is highly competitive, with the market divided among a number of privately-owned companies whose share of the market is smaller than ours. We believe that the nature of the bidding process, the level of performance bonding required, and the industry’s regulated environment serve as barriers to market entry, and that the expertise of our management and our employees gives us an advantage over competitors.

~~Table~~We believe that our expertise in site preparation and on-site installation gives us a competitive advantage over many manufacturers of ~~Contents~~higher-priced, customized modular units, while our vertically integrated, assembly-line approach to manufacturing enables us to be one of the low-cost producers of standardized, modular relocatable classrooms in California and Florida. Unlike many of our competitors, we manufacture most of our own metal components which allows us to maintain quality control over these components and to produce them at a lower average cost than that at which they could be obtained from outside sources. We also believe that the quality and appearance of our buildings, and our reputation for reliability in completion of our contracts, enable us to maintain a favorable position among our competition.

~~We categorize our current competition based upon~~ As the ~~geographic market served, as well as upon the relative degree of~~ ~~customization~~ demand offor ~~products~~modular ~~sold.~~classrooms ~~The primary competitors in California are believed to be American Modular Systems~~ and ~~Design~~other ~~Mobile~~non-residential ~~Systems,~~buildings ~~both~~has ~~of which are located~~ shifted in ~~Northern California. Each of these competitors is a privately-owned company.~~ ~~With~~ recent ~~the~~years ~~upcoming~~from ~~closure~~standardized ofbuildings ~~our~~to ~~Lathrop~~more ~~facility~~complex, ~~our~~customized ~~competitors~~buildings, we ~~in Northern California will~~ have ahad ~~competitive advantage relative~~ to ~~transportation~~modify ~~costs. However, it is~~ our ~~belief~~production ~~that~~process increased transportation costs will be offset by efficiency gains attributable to the consolidation of manufacturing into a more efficient operation. Previously reported competitors, Aurora Modular Industries and ~~Turn Key Schools~~, ~~both~~as ~~located~~a ~~in Perris~~result, ~~California~~have ~~discontinued~~at ~~operations~~times experienced incompetitive ~~2004~~disadvantages.

~~Outside of the California classroom market, the nonresidential modular~~We ~~building~~ categorize ~~industry is highly competitive and fragmented. For~~ our ~~highly~~current ~~customized~~competition ~~modular~~based ~~buildings,~~upon the ~~main~~geographic ~~competitive~~market ~~factor is the ability to meet end user requirements in a timely manner~~served, as well ~~while~~as ~~price~~upon is the ~~main~~relative ~~competitive~~degree ~~factor~~of ~~for~~customization ~~less customized~~of ~~structures~~products sold. ~~Because~~The ~~the~~primary competitors ~~cost~~in ofCalifornia ~~transporting~~in ~~completed~~ modular ~~buildings~~classrooms isare ~~substantial,~~believed ~~most manufacturers limit their distribution~~ to ~~dealers~~be ~~located~~American Modular ~~within~~Systems, aInc. ~~400-mile~~and ~~radius~~Global ofModular, ~~their manufacturing facility~~Inc. ~~As a result~~, ~~the nonresidential~~both ~~modular~~of ~~building~~which ~~industry~~are islocated ~~highly~~in Northern ~~fragmented~~California, and isModular ~~composed~~Structures ~~primarily of small~~International, ~~regionally based private companies maintaining a single manufacturing facility~~Inc. ~~These~~and ~~small~~Silver Creek Industries, ~~regionally~~Inc. ~~based~~located ~~private~~in ~~companies~~Southern ~~may have a competitive advantage relative to certain overhead costs associated with a comparatively larger, publicly traded company~~California.

~~Our~~The nonresidential ~~primary~~modular ~~competitors~~building ~~for~~industry ~~non-California~~is ~~classroom~~highly competitive and fragmented. For our highly customized modular buildings, ~~are~~the ~~believed~~main competitive factor is the ability to bemeet ~~Modular~~end ~~Structures~~user ~~International~~requirements in a timely manner, ~~Walden~~while ~~Structures~~price is the main competitive factor for less customized structures. Because the cost of transporting completed modular buildings is substantial, ~~Miller~~most ~~Building~~manufacturers limit ~~Systems~~their distribution to dealers located within a 400-mile radius of their manufacturing facility. As a result, the nonresidential modular building industry outside of California is highly fragmented and ~~Indicom~~is ~~Building~~composed ~~Systems~~primarily of small, regionally based private companies maintaining a single manufacturing facility. These small, regionally based private companies may have a competitive advantage relative to certain overhead costs associated with a comparatively larger, publicly traded company.

~~PERFORMANCE BONDS~~ 7

AOur primary ~~substantial~~competitors ~~portion~~for ofmodular ~~our~~buildings ~~sales~~other ~~require~~than ~~bid,~~non-California ~~performance~~classroom manufacturers ~~and~~are ~~payment~~believed ~~bonds~~ to ~~ensure that the contracts will~~ be ~~performed~~Modular ~~and~~Structures ~~completed in accordance with contract terms and conditions~~International, ~~and to assure that subcontractors and suppliers will be paid~~Inc. ~~In determining whether to issue a performance bond on our behalf~~, ~~bonding companies~~Walden ~~consider~~ Structures aInc., ~~variety~~Miller ofBuilding ~~factors concerning the specific project to be bonded~~Systems, ~~as well as our levels of working capital~~Inc., ~~shareholders’~~Southeast ~~equity~~Modular Manufacturing, and ~~outstanding~~Indicom ~~indebtedness~~Buildings Inc. ~~From~~Each ~~time~~year tothere ~~time~~are wenew ~~have~~entrants ~~had,~~ and departures in ~~the future may again encounter,~~ ~~difficulty~~ response into ~~obtaining~~perceived ~~bonding~~market ~~for a given project~~conditions. ~~Although~~A werecent ~~have~~example ~~been~~is ~~able~~a tonew ~~obtain~~start-up company, ~~the~~Silver ~~bonding~~Creek ~~we have needed during the last twelve months~~Industries, weInc. ~~believe~~which ~~that~~began ~~our~~operations ~~difficulty~~ in ~~obtaining~~2005 ~~bonding~~and ~~for certain large projects from time to time in~~opened ~~the~~ its ~~past has been attributable to our levels of working capital~~Perris, ~~shareholders’~~California ~~equity~~factory ~~and~~in ~~indebtedness,~~January ~~and not concerns about our ability to perform the work required under the contract~~2006.

~~RAW MATERIAL AND COMPONENTS~~ Performance Bonds

~~The~~A substantial ~~raw~~portion ~~materials~~of ~~used~~our insales ~~our~~require ~~business~~bid, ~~consist~~performance ~~mainly~~and ofpayment ~~commodities~~bonds to ensure ~~such~~that asthe ~~steel,~~contracts ~~lumber and~~will ~~plywood,~~be ~~electrical~~performed ~~components~~and ~~such~~completed asin ~~plugs,~~accordance ~~switches~~with contract terms and ~~lights~~conditions, ~~plumbing~~and ~~components~~to ~~such~~assure asthat ~~pipe,~~subcontractors ~~fittings~~ and ~~fixtures,~~suppliers will ~~heating~~be ~~and~~paid. ~~air~~In ~~conditioning~~determining ~~units~~whether ~~and~~to ~~other~~issue ~~general~~a ~~construction~~performance ~~materials.~~bond Weon ~~are~~our ~~not~~behalf, bonding ~~dependant~~companies ~~upon~~consider a ~~single~~variety ~~source~~of factors concerning the specific project ~~for~~ to be bonded, as well as our ~~principal~~levels ~~raw~~of ~~materials~~working capital, stockholders’ equity and outstanding ~~such~~indebtedness. ~~materials~~From time to time we have ~~historically~~had ~~been~~difficulty ~~readily~~in ~~available.~~obtaining bonding ~~Although~~for ~~there~~certain ~~were~~large ~~dramatic~~projects. ~~increases~~We inbelieve ~~the~~this ~~cost~~has ofbeen ~~steel~~attributable ~~during~~to our levels ~~2004~~of working capital, westockholders’ ~~did~~equity and indebtedness, and not concerns ~~experience~~about ~~any~~our ~~significant~~ability ~~steel~~to ~~shortages.~~perform Wethe ~~believe~~work werequired ~~currently~~under ~~have~~the contract. ~~ready~~ Although ~~access~~we have been able to ~~adequate~~obtain ~~supplies~~the ofbonding ~~raw~~we ~~materials~~have ~~and~~needed ~~components~~during ~~from~~the last twelve ~~numerous~~months, ~~suppliers~~we atmay ~~competitive~~again ~~prices.~~encounter difficulty in obtaining bonding for certain projects.

~~PATENTS,~~Raw Material ~~TRADEMARKS,~~and ~~LICENSES AND OTHER INTELLECTUAL PROPERTY~~ Components

~~“Modtech”~~The raw materials isused in our ~~only~~business ~~registered~~consist ~~trademark.~~mainly Weof docommodities ~~not~~such ~~have~~as ~~any~~steel, lumber ~~patents.~~and Weplywood, ~~hold~~electrical ~~general~~components ~~contractors~~such ~~licenses~~as inplugs, ~~those~~switches ~~states~~and ~~where~~lights, ~~our~~ plumbing ~~activities~~components ~~require~~ such ~~licenses.~~as ~~These~~pipe, ~~licenses~~fittings ~~are~~and ~~readily~~fixtures, ~~available~~heating and ~~renewable~~air conditioning ~~annually~~units and other general construction materials. We ~~also~~are ~~hold~~not dependent ~~certain~~upon ~~intellectual~~a ~~property~~single insource ~~the~~for ~~form~~our ofprincipal ~~proprietary~~raw ~~designs~~materials ~~which~~and such materials have historically been ~~approved~~readily ~~for~~available. ~~modular~~We ~~classroom~~believe ~~design~~we bycurrently have ready ~~the~~access ~~State~~to adequate supplies of raw materials and components from numerous ~~California~~ suppliers at competitive prices. ~~These~~The ~~approved~~cost ~~designs~~of ~~and~~raw ~~plans~~materials ~~are~~represents ~~required~~a significant inportion ~~order~~of toour ~~sell~~operating ~~classrooms~~expenses. ~~into~~As a result of domestic and international events, the ~~State~~prices of ~~California~~raw ~~classroom~~materials ~~market~~we use in our operations fluctuate and ~~create~~have asignificantly ~~short~~increased ~~term~~in ~~barrier~~recent years. We are not always able to ~~entry~~obtain ~~into~~the right in our contracts to pass through raw material price increases to our customers. Should we experience significant increases in the price of raw materials as we did in 2004, our profitability could be adversely affected.

8Patents, Trademarks, Licenses and Other Intellectual Property

~~Table~~We use two registered trademarks; “Modtech” and “the right space, at the right time, for the right price”. We do not have any patents. We hold general contractors licenses in those states where our activities require such licenses. These licenses are readily available and renewable annually. We also hold certain intellectual property in the form of ~~Contents~~proprietary designs that have been approved for modular classroom design by the State of California. These approved designs and plans are required in order to sell classrooms into the State of California classroom market and create a short term barrier to entry into the California classroom market. We estimate that it takes approximately six months to obtain approval for a new set of plans. Our rights in our trademark and proprietary designs are for an indefinite term.

Environmental ~~California~~ and ~~classroom~~Health ~~market. We estimate that it takes approximately six months to obtain approval for a new set of plans. Our rights in our trademark~~ and ~~proprietary~~ ~~designs~~Safety ~~are for an indefinite term.~~ Matters

~~ENVIRONMENTAL~~Like other ~~AND~~manufacturing ~~HEALTH~~concerns, ~~AND~~we ~~SAFETY~~are ~~MATTERS~~subject to numerous laws and regulations that govern environmental and occupational health and safety matters. We believe that our operations are substantially in compliance with all such applicable laws and regulations. Such compliance has not caused us to incur, nor do we expect to incur, any material expenditures or liabilities for environmental matters. As a result, our environmental obligations have not had a material effect on our capital expenditures, earnings or competitive position in the past, and we do not believe they will have a material effect in the future.

~~Like other manufacturing~~The ~~concerns~~ Phoenix facility, which we ~~are~~lease, ~~subject~~is tolocated ~~numerous~~within ~~laws~~a ~~and~~25-square-mile ~~regulations~~area ~~that~~listed by ~~govern~~the ~~environmental~~Arizona ~~and~~Department ~~occupational~~of ~~health~~Environmental ~~and~~Quality ~~safety~~on ~~matters.~~the Westate ~~believe~~priority ~~that~~list for ~~our~~contaminated ~~operations~~sites. ~~are~~According ~~substantially~~to ina ~~compliance~~1999 ~~with~~environmental ~~all~~site ~~such~~assessment ~~applicable laws and regulations. Such~~report ~~compliance~~ pertaining ~~has~~to ~~not~~the ~~caused~~Phoenix ~~us to incur~~facility, ~~and~~neither we donor ~~not~~the ~~expect~~prior tooperators ~~incur~~or ~~any~~owners of ~~material~~the ~~expenditures~~property orhave ~~liabilities~~been ~~for~~identified ~~environmental~~as ~~matters.~~potentially Asresponsible aparties ~~result~~at this site. Additionally, ~~our~~the environmental ~~obligations~~site ~~have~~assessment ~~not~~report ~~had~~identified ano historical ~~material~~activity ~~effect~~ on ~~our capital expenditures, earnings or competitive position in~~ the ~~past,~~property ~~and~~ we dolease ~~not~~that ~~believe~~was ~~they~~likely ~~will~~to have been a source ~~material~~of ~~effect~~the incontaminants at the ~~future~~site.

The Phoenix facility, which we lease, is located within a 25-square-mile area listed by the Arizona Department of Environmental Quality on the state priority list for contaminated sites. According to a 1999 environmental site assessment report pertaining to the Phoenix facility, neither we nor the prior operators or owners of the property have been identified as potentially responsible parties at this site. Additionally, the environment site assessment report identified no historical activity on the property we lease that was likely to have been a source of the contaminants at the site. 8

~~EMPLOYEES~~ Employees

The number of persons employed by us at year end ~~2004~~2007, ~~2003~~2006, and ~~2002~~2005 were 1399,~~395~~ 710, ~~901,~~ and 1,~~273~~071, respectively. None of our employees are represented by a labor union, and we have experienced no work stoppages. We believe that our employee relations are good.

~~INFORMATION~~Information Available ~~AVAILABLE~~on ONOur ~~OUR~~Website ~~WEBSITE~~and Elsewhere

We make available free of charge on our ~~internet~~ website at www.modtech.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the ~~Securities~~U.S. ~~and~~Securities and Exchange Commission (“SEC”). Our SEC filings, as well as those of other companies that file electronically with the SEC, are available at the SEC’s ~~Internet~~ website at www.sec.gov. You may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at ~~450~~100 ~~Fifth~~F Street, N.WE., Washington, D.C., 20549. ~~Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330.~~ In addition to SEC filings, we also ~~post~~make on our ~~website~~ press releases, ~~information~~available ~~regarding~~on our ~~Whistle~~website, ~~Blower~~as ~~program~~well ~~and~~as information ~~about~~regarding ~~other company initiatives such as~~ our ~~Six~~Whistle Blower ~~Pillars of Excellence Award Program and our Lean Enterprise Team Charter~~program.

ITEM 2 1A. ~~PROPERTIES~~RISK FACTORS

Our business ~~principal~~is ~~executive~~subject ~~and~~to ~~administrative~~a ~~facilities~~number ~~are located in approximately 17,000 square feet~~ of ~~modular~~business ~~buildings~~risks atand ~~our~~uncertainties ~~primary~~that ~~manufacturing facility located in Perris, California. This manufacturing~~could ~~facility~~ impact ~~occupies~~the 25accuracy ~~acres, with approximately 226,000 square feet~~ of ~~covered~~any ~~production~~forward ~~space~~looking ~~under~~statements ~~roof, pursuant to a lease expiring~~ in ~~2014.~~this AReport ~~second~~and ~~facility~~cause actual inresults ~~Perris~~to ~~occupies~~differ ~~approximately~~materially ~~thirty~~from ~~acres,~~those ~~with~~projected ~~approximately~~or ~~120,000~~anticipated. ~~square feet~~These of risk ~~covered~~and ~~production~~uncertainties ~~space under roof~~include, ~~pursuant~~but toare anot ~~lease~~limited ~~expiring in 2014. This second facility also includes approximately 80~~to,~~000~~ ~~square feet under roof used as a metal working facility.~~ the following:

~~Our~~We have ~~third~~incurred ~~plant~~significant ~~consists~~operating ~~of a 400~~losses,~~000~~ ~~square~~negative ~~foot~~gross ~~manufacturing~~margins ~~facility,~~as ~~with approximately~~well ~~160,000~~ as negative ~~square~~operating ~~feet~~cash offlow ~~covered~~and ~~production~~may ~~space~~continue ~~under~~to ~~roof,~~do onso. aThis ~~30-acre~~could ~~site~~adversely affect inour ~~Lathrop~~liquidity, ~~California~~our ~~that~~ability ~~is leased through 2019. On February 1, 2005, management approved plans~~ to ~~consolidate~~obtain ~~our~~bonding ~~manufacturing~~necessary ~~facilities~~for ~~by closing the Lathrop plant~~our in construction ~~Northern~~projects ~~California~~ and ~~shifting~~our ~~production~~ability to service our ~~other plants, principally those located in Southern~~ debt.

We experienced significant operating losses and negative cash flow from operations in 2007, 2006 and 2005. We may continue to experience future operating losses and negative operating cash flow. For the year ended December 31, 2007, our revenues were down 44.0% compared to the year ended December 31, 2006. We experienced a net loss of $56.9 million for the year ended December 31, 2007 and net cash used in operating activities was $6.2 million for the year. Although we had positive gross profit during the year ended December 31, 2006, we experienced a net loss of $54.7 million for the year ended December 31, 2006 and net cash used in operating activities was $7.5 million for the year. We may experience future losses that could adversely affect our liquidity and ability to obtain bonding.

~~Table~~The promissory notes issued to Laurus Master Fund, Ltd. (“Laurus”), which had a principal balance of ~~Contents~~$14.4 million at December 31, 2007, are secured by liens on substantially all of our assets. Should we default under these notes the note holder could foreclose on all of our assets. We may not generate sufficient cash flow to repay our indebtedness, and we may not be able to obtain additional financing or refinance our indebtedness when needed on reasonable terms, if at all. The failure to obtain such financing would reduce our access to necessary capital to fund our operations and harm our business, results of operations and financial condition.

In ~~California.~~ the ~~The~~past ~~closure,~~three ~~which was completed on April 30~~years, ~~2005,~~we ~~resulted~~have inbreached the ~~elimination~~financial covenants of ~~approximately~~our ~~140 employee positions. We expect that the plant~~debt ~~closure~~ instruments ~~will reduce costs~~ and ~~enhance~~credit ~~profitability~~facilities. ~~We estimate that the aggregate costs incurred in connection with the plant closure, including redeployment of assets, and related costs will be approximately $700,000.~~

~~The~~During the ~~fourth~~past ~~plant~~three ~~consists~~years, ofwe ~~approximately~~have, 50at times,~~000~~ ~~square~~been ~~feet~~unable ofto ~~covered~~meet ~~production~~certain ~~space~~financial ~~under~~ ratios ~~roof,~~or oncovenants arequired ~~10-acre~~by ~~site~~our incurrent ~~Phoenix,~~lenders ~~Arizona,~~and ~~pursuant~~have tobeen aforced ~~lease~~to seek waivers ~~expiring~~of indefault ~~2007~~and amendments. ~~The~~In ~~fifth~~some ~~plant consists of approximately 80~~instances,~~000~~ ~~square~~we ~~feet~~have ofincurred substantial ~~manufacturing~~fees ~~area~~to onobtain athe ~~20-acre~~waivers. ~~site~~In inFebruary ~~Glen Rose~~2008, ~~Texas,~~we ~~outside~~agreed ~~the~~to ~~Dallas-Fort Worth~~pay ~~metropolitan~~ to Laurus ~~area.~~and ~~The~~two ~~Texas~~of ~~lease~~its ~~expires~~related inentities ~~2008.~~an Weaggregate ~~purchased~~of a$750,000, ~~sixth~~plus ~~facility~~interest, on inDecember ~~January~~29, ~~2003~~2009 ~~for~~in ~~approximately~~order ~~$2.5~~to ~~million.~~obtain ~~This~~a ~~facility,~~waiver ~~including~~of ~~office~~an ~~space,~~event ~~consists~~ of ~~106,000~~default ~~square~~under the ~~feet~~promissory onnotes aissued ~~17-acre~~to ~~site~~Laurus in ~~Plant City, Florida, northeast of Tampa~~2006.

~~During~~Our indebtedness ~~2003,~~to weLaurus ~~closed~~and ~~three~~its ~~facilities.~~related Weentities, ~~chose~~which ~~not~~had toa principal balance ~~renew~~ of ~~our~~$14.4 ~~lease~~million ~~for~~as aof ~~plant~~December in31, ~~Glendale~~2007, ~~Arizona~~is secured by liens on substantially all of our assets. ~~The~~If ~~operations~~we atdefault under this ~~plant~~indebtedness ~~were~~again ~~consolidated~~and ~~into~~are ~~the~~unable to negotiate ~~Phoenix~~an ~~operation.~~amendment, Weforbearance ~~also~~or ~~chose~~waiver, ~~not~~we could be required to ~~renew~~repay all amounts ~~our~~then ~~lease~~outstanding ~~for~~or face a ~~plant~~foreclosure inon ~~St.~~all ~~Petersburg,~~of ~~Florida~~our assets. Acceleration ~~The~~of ~~operations~~the ~~from~~notes ~~this~~could ~~plant~~require ~~and~~us ~~from~~to ~~a company-owned~~refinance ~~facility~~the ~~also~~debt inon Stterms less favorable to us. ~~Petersburg~~If ~~were~~we ~~consolidated~~are ~~into~~unable to refinance the ~~newly~~debt, ~~purchased~~we ~~and~~would ~~expanded~~be ~~operations~~forced to repay init ~~Plant~~from ~~City~~existing funds, ~~Florida~~if available. Such a repayment would substantially reduce funds for operations and ~~the~~seriously ~~leased~~harm ~~facility~~our ~~was~~business, ~~turned~~financial ~~back~~condition and toresults ~~the~~of ~~owner~~operations. ~~The~~We ~~company-owned~~could ~~property~~be inforced ~~St.~~to ~~Petersburg~~liquidate ~~was~~assets ~~sold~~in order ~~during~~ to repay ~~2004.~~the debt.

~~We believe that our facilities are well maintained and in good operating condition, and meet the requirements for our immediately foreseeable business needs.~~ 9

~~ITEM~~Our substantial 3.leverage ~~LEGAL~~could ~~PROCEEDINGS~~adversely affect our financial condition.

We are highly ~~not~~leveraged ~~involved~~and inexpect ~~any~~to ~~legal~~continue ~~proceedings other than those of a nature considered normal~~ to ~~our~~be ~~business,~~highly ~~including~~leveraged. ~~product~~As ~~liability,~~of ~~employment disputes~~December 31, ~~administrative~~2007 ~~proceedings~~such ~~and~~indebtedness ~~commercial~~was ~~litigation~~$14.4 ~~Such proceedings~~million. ~~often~~As ~~do not specify the amount~~ of ~~damages~~December ~~sought~~31, ~~are~~2006 ~~subject~~such indebtedness towas ~~many uncertainties and outcomes that are not predictable with assurance~~$19.5 ~~Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these pending proceedings~~million. ~~While~~The ~~these~~notes ~~matters~~must ~~could~~be ~~affect~~repaid ~~operating results of any one quarter when resolved~~ in ~~future~~full ~~periods~~by December 28, it2009. isThe ~~management’s~~notes ~~opinion~~are ~~that~~not ~~after~~a ~~final~~revolving ~~disposition,~~credit ~~any~~facility ~~monetary~~which ~~liability~~we or can ~~financial~~pay ~~impact~~down toand usborrow ~~beyond~~against ~~that provided for at year-end would not be material to our financial position or results of operations~~again.

~~ITEM~~Should we experience 4.a ~~SUBMISSION~~decline OFin ~~MATTERS~~the TOvalue Aof ~~VOTE~~our OFassets ~~SECURITY~~which ~~HOLDERS~~secure our debt, it would limit our ability to obtain additional or new financing, if necessary, for operating expenses, or limit our ability to obtain such financing on reasonable terms.

NoOur future ~~matters~~results ~~were~~may ~~submitted~~fluctuate toor ~~the~~fail ~~vote~~to ofmeet ~~security holders during the fourth quarter of fiscal 2004~~expectations.

10Our results may fluctuate in the future or fail to meet the expectations of securities analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of:

~~Table~~· ofgeneral ~~Contents~~economic conditions in the states where we sell our products;

~~PART~~· IIlegislative and educational policies in the states where we sell our products;

~~ITEM~~· 5.seasonality ~~MARKET~~and ~~FOR~~variability ~~REGISTRANT’S~~in ~~COMMON~~the ~~EQUITY,~~modular ~~RELATED~~classroom ~~STOCKHOLDER~~and ~~MATTERS,~~our ~~AND~~other ~~ISSUER PURCHASES OF EQUITY SECURITIES~~end-markets;

~~Our~~· ~~common stock is traded on~~ the ~~NASDAQ~~timing ~~National Market System under the symbol “MODT” (as~~ of ~~the~~new ~~filing~~product ~~date,~~introductions ~~Modtech’s~~by ~~symbol~~us ~~is “MODTE”). The range of high~~ and ~~low~~our ~~sales prices for the common stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below, are as follows:~~ competitors;

Quarter Ended	High		Low
3/31/03	$	10.00	$	6.55
6/30/03		9.75		6.95
9/30/03		9.74		7.26
12/31/03		8.66		7.44
3/31/04		9.41		7.13
6/30/04		8.09		6.54
9/30/04		8.11		7.10
12/31/04		8.89		7.21

product obsolescence;

On· ~~May~~the 13scheduling, ~~2005,~~rescheduling ~~the~~or ~~closing~~cancellation ~~sales price on the NASDAQ National Market for a share~~ of ~~our~~orders ~~Common~~by ~~Stock was $7.46. The approximate number of holders of record of~~ our ~~Common Stock on May 13, 2005, was 56.~~ customers;

~~STOCK~~· ~~COMPENSATION~~the ~~PLAN~~cyclical ~~TABLE~~nature of demand for our products;

~~The~~· ~~following~~capacity table sets forth the number of shares to be issued upon exercise of outstanding options, the weighted-average exercise price of such options, and the number of shares remaining available for issuance as of the end of our most recently completed fiscal year. utilization;

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstandingoptions, warrantsand rights	Number of securitiesremaining available for future issuance underequity compensation plans (excluding securitiesreflected in column
Equity compensation plans approved by security holders	1,975,569	$9.31	90,823
Equity compensation plans not approved by security holders	N/A	N/A	N/A

product mix and pricing;

~~DIVIDEND~~· ~~POLICY~~movements in interest rates or tax rates; and

We· ~~have~~litigation ~~not paid a dividend on common stock at any time since 1990. The Board of Directors currently intends to follow a policy of retaining all earnings, if any, to finance our continued growth~~ and ~~development~~regulatory ~~and does not anticipate paying cash dividends on our common stock in the foreseeable future~~matters. Our current credit facilities prohibit the payment of dividends. Any future determination as to the payment of cash dividends will be dependent upon our financial condition and results of operations, the provisions of our then current credit facilities, and other factors deemed relevant by the Board of Directors.

11The prices of raw materials have significantly increased in recent years and if we are unable to pass these costs onto our customers, our financial results could be significantly harmed.

~~Table~~The cost of raw materials represents a significant portion of ~~Contents~~our operating expenses. As a result of domestic and international events, the prices of raw materials we use in our operations fluctuate and have significantly increased in recent years. For example, during 2004, the cost of steel nearly doubled for certain steel used in some of our components and overall our steel costs were up in excess of 30%. We are not always able to obtain the right in our contracts to pass through raw material price increases to our customers. Should we experience significant increases in the price of raw materials as we did in 2004, our financial results could be adversely affected.

~~ITEM~~Our current 6.promissory ~~SELECTED~~notes ~~FINANCIAL~~contain ~~DATA~~certain ~~(DOLLARS~~covenants INand ~~THOUSANDS,~~financial ~~EXCEPT~~conditions that limit ~~PER~~the ~~SHARE~~way ~~DATA)~~we conduct business.

The promissory ~~selected~~notes ~~financial~~we ~~data~~issued ~~presented~~to ~~below~~Laurus ~~should be read in conjunction with “Management’s Discussion~~ and ~~Analysis~~the ofrelated ~~Financial~~agreements ~~Condition~~contain ~~and Results of~~various ~~Operations”~~ covenants ~~and~~limiting our ~~consolidated~~ability ~~financial~~to ~~statements~~incur ~~and~~or ~~the~~guarantee ~~notes~~additional ~~thereto included elsewhere in this report. Our statement of operations data for the years ended December 31~~indebtedness, pay ~~2004,~~dividends ~~2003,~~ and ~~2002~~make ~~and~~other ~~our~~distributions, ~~balance~~make ~~sheet~~capital ~~data as of December 31~~expenditures, make ~~2004~~ acquisitions and ~~2003~~sell ~~have~~assets. ~~been~~These ~~derived~~covenants ~~from~~may ~~our~~prevent ~~audited~~us ~~consolidated~~from ~~financial~~raising additional ~~statements included elsewhere in this report which have been audited by KPMG LLP~~financing, ~~whose~~competing ~~report~~effectively isor ~~included~~taking ~~elsewhere~~advantage inof ~~this~~new ~~report~~business opportunities. ~~Our~~Under ~~statement of operations data for~~ the ~~years~~ ~~ended December 31~~notes, ~~2001~~we ~~and~~are ~~2000~~also ~~and~~required ~~our~~to ~~balance~~maintain ~~sheet~~a ~~data~~minimum amount as of ~~December~~cash ~~31, 2002, 2001,~~ and ~~2000~~approved ~~have~~accounts ~~been derived from our audited consolidated financial statements, which are not presented in this report~~receivable.

	Year Ended December 31,
	2004			2003			2002			2001			2000
Statement of Operations Data:(1)
Net sales	$	185,194		$	159,870		$	167,973		$	201,116		$	234,734
Cost of goods sold		188,114			147,938			144,782			165,068			198,501
Gross (loss) profit		(2,920	)		11,932			23,191			36,048			36,233
Selling, general and administrative expenses		14,495			8,129			7,731			8,586			8,011
(Gain) loss on sale of property and equipment		(745	)		1			2			—			—
Goodwill and covenant amortization		29			79			368			3,751			3,702
(Loss) income from operations		(16,699	)		3,723			15,090			23,711			24,520
Interest income (expense), net		(2,836	)		(1,359	)		(1,628	)		(3,067	)		(4,928	)
Other income		881			31			42			91			61
(Loss) income before income taxes and cumulative effect of a change in an accounting principle		(18,654	)		2,395			13,504			20,735			19,653
Income taxes benefit (provision)		108			(938	)		(5,773	)		(9,606	)		(9,237	)
(Loss) income before cumulative effect of a change in an accounting principle		(18,546	)		1,457			7,731			11,129			10,416
Cumulative effect of a change in an accounting principle		—			—			(37,289	)		—			—
Net (loss) income		(18,546	)		1,457			(29,558	)		11,129			10,416
Net (loss) income available for common shareholders(2)	$	(18,767	)	$	1,450		$	(29,714	)	$	10,973		$	10,260
Basic (loss) earnings per common share before cumulative effect of a change in an accounting principle	$	(1.35	)	$	0.11		$	0.56		$	0.82		$	0.78
Cumulative effect of a change in an accounting principle per common share—basic		—			—			(2.76	)		—			—
Basic (loss) earnings per common share	$	(1.35	)	$	0.11		$	(2.20	)	$	0.82		$	0.78
Basic weighted-average shares outstanding		13,949			13,708			13,499			13,431			13,238
Diluted (loss) earnings per common share before cumulative effect of a change in an accounting principle	$	(1.35	)	$	0.10		$	0.52		$	0.76		$	0.72
Cumulative effect of a change in an accounting principle per common share—diluted		—			—			(2.57	)		—			—
Diluted (loss) earnings per common share	$	(1.35	)	$	0.10		$	(2.05	)	$	0.76		$	0.72
Diluted weighted-average shares outstanding		13,949			14,122			14,492			14,442			14,357

We have experienced significant turnover of senior management and our current executive management team has been together for a limited time, which could slow the growth of our business and cause our operating results to decline.

12Throughout 2003 and 2004, we announced a series of changes in our management that included the departure of several senior executives, and there have also been changes in the responsibilities of our board of directors. Our chairman, Charles C. McGettigan, a long serving company director became chairman in August 2003. In June 2003, Dennis Shogren joined us as our chief financial officer and in September 2004, David Buckley joined us as our chief executive officer. Mr. Buckley resigned in 2006, and Mr. Shogren was appointed chief executive officer. Kenneth Cragun joined us in 2006 as our new chief financial officer.

~~Table of Contents~~10

	As of December 31,
	2004			2003			2002			2001			2000
Balance Sheet Data:(1)
Working capital	$	11,560		$	21,480		$	28,001		$	25,265		$	17,153
Total assets		179,145			145,562			153,807			185,903			187,702
Total liabilities		87,217			39,188			49,277			52,099			65,610
Long-term debt, excluding current portion		19,756			6,000			12,000			19,000			23,600
Shareholders’ equity		91,928			106,374			104,530			133,804			122,092
	Year Ended December 31,
	2004			2003			2002			2001			2000
Selected Operating Data:
Gross (loss) margin		(1.6	)%		7.5	%		13.8	%		17.9	%		15.4	%
Operating (loss) margin		(9.0	)%		2.3	%		9.0	%		11.8	%		10.4	%
Backlog at period end(3)	$	172,000		$	115,000		$	85,000		$	80,000		$	80,000

Other members of our senior management team are new to Modtech or new in their positions. Because of these recent changes, our management team has not worked together as a group for an extended period of time and may not work together as effectively to successfully execute on revenue goals, implement our strategies and manage our operations as they would if they had worked together for a longer period of time.

~~(1)~~If our management Asteam ~~summarized~~is inunable ~~Note~~to 19accomplish toour business objectives, our ~~consolidated~~ability to grow ~~financial~~our ~~statements,~~business ~~certain~~and ~~immaterial~~successfully ~~corrections~~meet ~~were~~operational ~~made~~challenges tocould ~~prior~~be ~~periods~~severely impaired.

~~(2)~~Only Mr. Shogren, ~~After~~Mr. ~~deduction~~Cragun ofand ~~preferred~~Ronald ~~stock~~Savona, ~~dividends~~Senior Vice President of ~~$221~~Operations,~~000~~ have long-term ~~for~~employment agreements and it is possible that the ~~year~~high ~~ended~~turnover ~~December~~at our senior ~~31,~~management ~~2004,~~levels ~~$7,000~~may also continue for ~~the~~a ~~year~~variety ~~ended~~of ~~December~~reasons. ~~31,~~We ~~2003~~are not aware ~~and~~of ~~$156~~impending retirements or voluntary separations,~~000~~ ~~for~~but ~~each~~the loss of the services ~~years~~of ~~ended~~one ~~December~~or 31more of our key senior executive officers could also affect our ability to successfully implement our business objectives, ~~2002~~which could slow the growth of our business and cause our operating results to decline. For these reasons, ~~2001~~our stockholders may lose confidence in our management team and ~~2000~~decide to dispose of our common stock, which could cause the price of our common stock to decline.

~~(3)~~ We receive ~~manufacture~~a ~~classrooms~~significant ~~and~~portion ~~other~~of ~~buildings~~our torevenues ~~fill~~from ~~existing~~the ~~orders~~sale ~~only,~~of ~~and~~classrooms ~~not~~to California ~~for~~school ~~inventory.~~districts, ~~Backlog~~the ~~consists~~leasing ofcompanies ~~sales~~that ~~orders~~lease ~~scheduled~~classrooms ~~for~~to such school ~~completion~~districts ~~during~~and ~~the~~from ~~next~~a 18small ~~months,~~number ~~approximately.~~of Weindependent ~~believe~~dealers. ~~approximately~~The ~~$125~~loss ~~million~~of any one of ~~the~~these ~~$172~~customers ~~million~~or ~~backlog~~failure ~~will~~to ~~convert~~collect ~~into~~a ~~sales~~receivable ~~during~~from ~~2005~~them could adversely affect our operations and financial position.

13We receive a significant portion of our revenues from the sale of classrooms to California school districts, to leasing companies that lease to such school districts and to a small number of independent dealers. Historically, certain California school districts, certain leasing companies and certain independent dealers have individually accounted for 10% or more of our consolidated revenues in certain quarters or represented 10% or more of our net accounts receivables on any given date. During the year ended December 31, 2007, sales of classrooms, directly or indirectly, for use in California schools accounted for approximately 49.9% of our net sales. During the same year, one independent dealer accounted for 6.5% of our net sales.

~~Table~~The loss of any significant customer, the failure to collect a significant receivable from a significant customer, any material reduction in orders by a significant customer or the cancellation of ~~Contents~~a significant customer order could significantly reduce our revenues and consequently harm our financial condition and our ability to fund our operations and service our debt.

~~ITEM~~Sales of 7.our ~~MANAGEMENT’S~~classroom ~~DISCUSSION~~product ~~AND~~are ~~ANALYSIS~~dependent OFupon ~~FINANCIAL~~the ~~CONDITION~~legislative ~~AND~~and ~~RESULTS~~educational policies OFand ~~OPERATIONS~~the financial condition of the states in which we do business.

~~OVERVIEW~~The demand for our modular relocatable classrooms is affected by various state statutes which, among other things, prescribe:

We· ~~are~~the away ~~leading~~in ~~provider~~which ofall ~~modular~~school classrooms into ~~the~~be ~~State~~constructed ofon ~~California~~public ~~and~~lands amust ~~significant~~be ~~provider~~designed ~~of commercial~~ and light industrial modular buildings in California, Nevada, Arizona, New Mexico, Utah, Colorado, Texas, Florida and other neighboring states. We are expanding our classroom offerings in all locations in response to increasing demand for new classroom products. engineered;

~~Key~~· ~~factors~~the ~~which~~methods ~~impact~~by ~~demand~~which customers for our ~~products~~classroom ~~include~~product, aprimarily ~~growing~~individual ~~population and the resulting increase in~~ school ~~age children in the regions we serve~~districts, ~~natural~~obtain ~~disasters~~funding ~~such~~for as the ~~hurricanes~~construction inof ~~Florida~~new ~~during~~facilities; ~~2004~~ and ~~increased demand from military bases. Demand increased in 2004 resulting in 15.8% increase in net sales over the prior year.~~

~~Throughout~~· ~~2004 our raw material costs were significantly and adversely affected by~~ the ~~rapid~~manner ~~rise~~ in ~~steel costs~~ which ~~nearly~~available ~~doubled~~funding ~~for~~is ~~certain steel used in our products~~spent. Lumber and plywood costs also increased significantly during 2004. Pricing for these commodities has stabilized in recent months and we believe that a more stable pricing environment will continue. We responded by raising our selling prices to the extent possible, but many of our existing contracts were fixed price contracts that did not allow us to pass through raw material price increases. Our profit margins were eroded because we were not able to fully offset our increased costs through price increases to our customers. Whenever possible, we attempt to negotiate a provision in our new contracts that will allow us to pass through cost increases to our customers.

WeAs a result, ~~are~~our ~~one~~business ofdepends ~~several~~upon ~~contractors working~~the onlegislative ~~the~~and ~~construction~~educational policies and financial condition of the ~~Heritage~~states ~~High~~in ~~School~~which ~~project~~we indo ~~Brentwood~~business. For example, in California., Wefunding ~~bid~~for ~~this~~new ~~project~~school inconstruction ~~2003~~and ~~with~~rehabilitation ~~the~~of ~~understanding~~existing schools ~~that~~by itschool ~~was~~districts tocurrently beis ~~built~~provided inprimarily aat ~~“modular~~the ~~friendly”~~state ~~manner~~level, through ~~but~~annual ~~this~~allocations ~~has~~of ~~not~~funds ~~occurred.~~derived Afrom ~~number~~general ofrevenue sources and statewide bond issues. ~~have~~In ~~come~~addition, upschool ~~with~~districts ~~the~~obtain ~~architect~~funding for the purchase or lease of school ~~district~~facilities asthrough the imposition of developers’ fees and local bond issuances. The availability of this funding is subject to financial ~~what~~and wepolitical ~~are~~considerations ~~obligated~~which vary from district to dodistrict and is ~~under~~not ~~the~~tied ~~contract~~to demand. ~~Our~~In ~~efforts~~California there is a requirement that, in order for school districts to ~~resolve~~increase ~~these~~the ~~issues~~amount ~~have~~of ~~resulted~~funds to be received from developers in ~~cost~~excess ~~overruns~~of the statutory level, school districts must show that 20% of $9all classroom space, not just space to be added, consists of relocatable classrooms.7 Although ~~million~~our ~~which~~classroom units qualify as relocatable structures, there are alternative ~~discussed~~structures that are less relocatable in ~~greater~~nature ~~detail~~than our classrooms that may also satisfy this legislative requirement. Changes in the legislative ~~“Results~~ and educational policies or shortages of ~~Operations”~~financial ~~below.~~resources at either state or local levels in the states in which we do business could decrease demand for our products.

Severance payments incurred in connection with the departure of three corporate officers, our former Chief Executive Officer, President and Secretary, during the quarter ended September 30, 2004 had a significant impact on the full year’s performance. In addition, we had several adjustments to inventory, project costs for some complex permanent modular construction projects and other increases in selling, general & administrative (SG&A) costs. 11

~~In order to comply with~~ Despite the ~~Sarbanes~~existence ~~Oxley Act~~ of ~~2002,~~some inbarriers ~~2004 we engaged consultants~~ to ~~assist~~entry ~~with~~into ~~documentation~~our ~~and~~markets, ~~testing~~our ofmarkets ~~our~~are ~~internal~~ competitive ~~controls~~ and ~~added~~our ~~staff~~market atshare ~~year-end~~may tobe ~~strengthen~~reduced ~~such~~if ~~controls.~~competitors ~~The~~enter ~~costs~~the ofmarket or ~~these measures significantly increased our expenses in 2004 and~~ we ~~anticipate~~are ~~that~~unable weto ~~will~~respond ~~incur~~to ~~significant~~our ~~expenses in the future as a result of continued~~competitors ~~compliance~~ effectively.

WeBarriers to ~~sought~~entry ~~additional~~into ~~financing~~the ~~during~~modular ~~the~~classroom ~~quarter~~and ~~ending~~commercial ~~December~~and light industrial modular ~~31,~~ building ~~2004~~markets ~~and~~consist ~~were~~primarily ~~able~~of access to ~~secure~~capital, the availability of a qualified ~~$25~~labor ~~million~~pool, ~~subordinated~~the ~~convertible~~nature ~~note~~of bythe ~~December~~bidding 31process, ~~2004.~~the ~~Subsequent~~level toof performance ~~year-end~~bonding werequired, ~~were~~and ~~able~~the toindustry’s ~~secure~~regulated aenvironment. ~~long-term~~In ~~debt~~the California ~~agreement~~market, for aexample, ~~$38~~the ~~million~~state ~~senior~~approves ~~credit~~the ~~facility~~designs ~~with~~and aplans ~~new~~for classrooms ~~lender~~sold ~~which~~to ~~allowed~~California us schools and the time required to ~~replace~~complete the approval ~~prior~~process ~~lender~~also ~~group.~~creates a barrier to entry.

WeHowever, manufacturers ~~view~~of ~~2005~~other asmodular abuildings, ~~transition~~including ~~year~~housing asand weclassrooms, ~~continue~~ who possess toa ~~grow~~skilled ~~and~~work ~~plan~~force toand ~~return~~manufacturing tofacilities, ~~profitability~~could byeasily ~~focusing~~adapt their onmanufacturing ~~several~~facilities ~~initiatives~~to ~~which~~produce ~~include~~modular ~~strict inventory management~~structures, ~~utilization~~and ofmight ~~national~~choose to ~~contracts~~do ~~for~~so, ~~materials~~during ~~and~~an ~~other~~economic ~~services~~downturn ~~and~~in ~~implementation~~their ofindustry. ~~lean~~We ~~enterprise~~expect ~~improvements.~~continued In competition ~~recent~~from ~~months,~~existing wecompetitors ~~have~~as ~~focused~~well onas ~~higher-margin~~competition ~~less-complex~~from ~~permanent~~new entrants into the modular ~~construction~~building ~~projects~~market. AsIn ~~a result~~2005, ~~the~~two ~~margin~~of in our ~~backlog~~former ofexecutive ~~permanent~~officers opened ~~modular~~separate ~~construction~~and ~~has~~unrelated ~~improved.~~modular Anbuilding ~~increased~~manufacturing ~~focus~~business, ~~on new market opportunities consistent~~one ~~with~~ in Texas ~~our~~and ~~manufacturing~~the ~~core~~other ~~competence~~across ~~has also shifted~~ the ~~reliance~~street from ~~complex~~our ~~lower-margin~~plant ~~projects to higher-margin less-complex sales~~ in ~~these new markets~~Perris, California.

14Our ability to compete successfully depends on several factors, including:

~~Table~~· ofmaintaining ~~Contents~~high product quality;

~~Certain~~· ~~corrections~~ability ~~have been made~~ to ~~prior~~deliver ~~periods~~products ~~related~~on ~~to the initial recognition of an expected receivable for~~ a ~~legal~~ ~~settlement.~~timely The receivable was recorded in the amount of $735,000, of which $242,000 was recorded in 2002, $383,000 in 2001 and $110,000 in 2000. After reviewing this accounting treatment, we have revised our current year presentation as a correction of an immaterial error in prior periods. The result of this correction was a decrease in other assets and retained earnings as of December 31, 2003 of $735,000. Final settlement of this legal case resulted in $795,000 recognized in other income during 2004. The effect of this correction on previously reported 2002 financial statements is summarized below and in note 19 to our consolidated financial statements. basis;

	2002 As Reported			2002 As Corrected
Income from operations	$	15,334,000		$	15,090,000
Income before income taxes		13,746,000			13,504,000
Net loss		(29,316,000	)		(29,558,000	)
Net loss applicable to common shareholders		(29,472,000	)		(29,714,000	)
Basic loss per share		(2.19	)		(2.20	)
Diluted loss per share		(1.99	)		(2.05	)
Other assets		1,319,000			584,000
Retained earnings		26,253,000			25,518,000

pricing policies of our competitors;

~~RESULTS~~· OFsuccess ~~OPERATIONS~~in designing and manufacturing new products;

~~The~~· ~~following~~performance ~~table sets forth, for the periods indicated, the percentages~~ of ~~net~~competitors’ ~~sales represented by certain items in our statements of operations.~~ products;

~~PERCENTAGE~~· OFmarketing, ~~NET~~manufacturing ~~SALES~~and distribution capability; and

	Years Ended December 31,
	2004		2003		2002
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	101.6		92.5		86.2
Gross (loss) profit	(1.6	)	7.5		13.8
Selling, general and administrative expenses	7.8		5.1		4.6
Gain on sale of property and equipment	(0.4	)	—		—
Covenant amortization	—		0.1		0.2
(Loss) income from operations	(9.0	)	2.3		9.0
Interest expense, net	(1.5	)	(0.8	)	(1.0	)
Other income	0.4		—		—
(Loss) income before income taxes and cumulative effect of a change in accounting principle	(10.1	)	1.5		8.0
Income taxes benefit (provision)	0.1		(0.6	)	(3.4	)
(Loss) income before cumulative effect of a change in accounting principle	(10.0	)%	0.9	%	4.6	%

financial strength.

~~YEAR~~To the extent ~~ENDED~~our ~~DECEMBER~~products 31achieve market success, ~~2004~~competitors ~~COMPARED~~typically seek to offer TO competitive ~~YEAR~~products ~~ENDED~~or ~~DECEMBER~~lower 31prices, ~~2003~~which, if successful, could reduce our market share, harm our ability to compete successfully and reduce our revenue and margins which could harm our business, results of operations and financial condition.

~~Net sales for the year ended December 31~~Fluctuations, ~~2004,~~ seasonality ~~increased~~and byeconomic ~~$25.3~~downturns ~~million,~~in orany ~~approximately 15.8%, when compared to the prior year. When compared to the prior year, Florida sales~~ of ~~$24.3~~our ~~million~~end-markets ~~were~~may uphave ~~51.8%; Texas sales of $12.4 million were up 38.0%; Arizona sales of $30.3 million were~~adverse up consequences ~~69.6%~~for ~~and~~our ~~California sales of $118~~business.~~2 million were up 1.0%. The significantly increased sales in Florida are a result of the much anticipated~~

15Our quarterly revenue typically has been highest in the second and third quarters of the year, when school districts generally place a large number of orders for modular classrooms to be delivered in time for the upcoming school year. Additionally, first and fourth quarter revenues are typically lower due to a greater number of holidays, days of inclement weather, and customer budget and fiscal constraints during such periods.

~~Table~~In the past, the level of ~~Contents~~funding available from the states in which we do business to the school districts which are the end customers of our classrooms have caused such districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations. If restrictions or limitations on funding available to school districts from the states in which we do business increases, it could result in a lower number of orders for our products which could reduce our revenues and consequently harm our financial condition and our ability to fund our operations and service our debt.

If ~~school~~ liabilities ~~market~~related ~~opening~~to upinspection ~~because of available state~~ and ~~local~~certification ~~funding.~~tests ~~The~~exceed ~~increased~~our ~~sales in Arizona are largely attributable to U.S. military troop housing~~estimates, ~~solutions~~ our asprofitability ~~bases~~could ~~were~~be ~~reorganized~~harmed. ~~General improvement in the commercial market sold primarily through dealers also contributed to the sales increase across the company.~~

~~California~~Most of our ~~classroom~~contracts ~~sales,~~require ~~including~~us ~~both~~to ~~relocatable~~build ~~and~~classrooms ~~permanent~~which ~~modular~~meet ~~construction~~certain ~~declined~~established state ~~8.3%~~mandated tofunction ~~$94~~and manufacturing specifications.6 ~~million~~Under ~~when~~such ~~compared~~contracts, we toassume the liability for correcting, without additional compensation, any deficiencies which cause the ~~prior~~classrooms ~~year~~to fail inspection and certification tests. ~~This~~We ~~decline~~rely inupon ~~net~~our ~~sales~~experience isand ~~due~~expertise to ~~timing~~evaluate ofthe ~~specific~~potential for such ~~projects~~liability asand ~~the~~to ~~overall~~price ~~backlog~~our ofbids ~~California~~accordingly ~~classroom~~and ~~projects~~we ~~grew~~follow ~~significantly~~strict ~~during~~quality control standards and subject our units under construction to extensive testing under the ~~year~~supervision of inspectors hired by our customers. If we incur such liability significantly in excess of our estimated profitability it could harm our business.

~~Gross~~In addition, ~~loss~~delays ~~for~~in ~~the~~obtaining ~~year~~approvals ~~ended~~can ~~December~~cause ~~31,~~costs ~~2004~~to ~~was~~exceed ~~$2.9~~our ~~million,~~estimates and aaffect ~~decrease~~our ~~of $14~~results.9 ~~million,~~For ~~or approximately 124.5%~~example, ~~when~~a ~~compared~~delay toin the ~~previous~~ ~~year.~~approval ~~Gross~~of ~~loss~~certain aswelds called afor ~~percentage~~in ofa ~~net~~project ~~sales~~for ~~decreased~~the toHeritage ~~1.6%~~High School in Brentwood, California in 2004 ~~from~~resulted ain ~~gross~~an ~~profit~~accelerated oftimeline ~~7.5%~~to incomplete ~~2003.~~that ~~The~~project ~~decrease~~which, in turn, ~~gross~~led ~~profit~~to ~~was~~approximately ~~due~~$3.8 tomillion ~~several~~in ~~factors.~~additional costs.

Cost overruns of $9.7 million were charged to the Heritage High School project in Brentwood, California. Four million dollars of these costs overruns resulted from events that occurred in 2004 and this portion of the cost overrun was identified by us prior to December 31, 2004. The remaining $5.7 million in additional cost overruns was identified in April and May 2005 prior to the issuance of our 2004 consolidated financial statements. These overruns are included in the 2004 results because they relate to certain contract conditions that existed as of December 31, 2004 and the subsequent information obtained during April and May 2005 allowed for the refinement of the loss estimate on this contract prior to the issuance of our consolidated financial statements. This refinement is made pursuant to paragraph 82 of the AICPA’s Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, which states that cost estimate refinements obtained subsequent to the balance sheet date should be included as an adjustment to the unissued financial statements. The Heritage project was substantially completed in the first week of June 2005. 12

OfWe are ~~the~~subject ~~total $9.7 million in cost overruns on the Heritage project, approximately $3.0 million was due~~ to ~~additional~~government ~~material,~~regulations ~~labor, project supervision~~ and ~~related~~other ~~costs.~~standards ~~The~~that ~~additional costs were caused by what we~~impose ~~consider~~ operational ~~differences between the architect’s plans~~ and ~~the~~reporting ~~specifications on which we bid the project~~requirements.

~~Approximately~~We are subject ~~$4.8~~to ~~million of the Heritage project cost overruns arose out of~~ a ~~dispute~~variety ~~between us and the architect concerning the structural integrity~~ of ~~our~~Untied ~~welds~~States ~~as called for in the original scope of the project. At the school district’s insistence~~federal, ~~the~~state ~~welds were tested in 2004 at a direct cost of approximately $1 million. The district delayed in approving the results of the test~~ and alocal ~~second~~government ~~test had to be conducted in 2005. The test results were~~laws, ~~approved~~ rules ~~by the school district~~ and ~~the~~regulations, ~~structural~~including ~~integrity~~those ofrelated ~~the welds confirmed in late March 2005. The delay in approving the welds resulted in an accelerated timeline~~ to ~~complete~~ the ~~Heritage project which~~use, ~~in turn~~storage, ~~led to approximately $3.8~~handling, ~~million~~ discharge inor ~~additional~~disposal ~~costs.~~of ~~The~~certain ~~additional~~toxic, ~~costs~~volatile ~~were~~or ~~primarily~~otherwise ~~labor~~hazardous chemicals ~~costs,~~used ~~including~~in the ~~subcontracting~~manufacturing ~~of additional laborers and overtime charges~~process.

~~Finally~~We believe we are currently in material compliance with such laws, ~~approximately~~rules ~~$1.9~~and regulations ~~million~~and ofprice ~~the~~our ~~Heritage~~bids ~~cost~~in ~~overruns~~accordance ~~were~~with our experience and expertise to include the ~~result~~costs of ~~correcting~~such ~~construction~~compliance. ~~quality~~If ~~problems~~there ~~discovered~~are ~~during~~changes ~~2005~~in assuch alaws, rules ~~result~~or ofregulations ~~the~~or we are found not to be in compliance with such laws, ~~inspection~~ rules ofor ~~the~~regulations, ~~weld~~we ~~tests~~could be required to incur substantial additional expenses to acquire equipment necessary to make our manufacturing process compliant and could incur fines or penalties associated with any non-compliance, which we are unable to quantify at this time but which could be material. Any such event could cause our product costs to significantly increase, thus reducing our margins and harming our ability to compete effectively. This would harm our business, results of operations and financial condition.

~~Inventory write~~The Sarbanes-~~downs~~Oxley ~~accounted~~Act ~~for approximately $1.7 million~~ of ~~the~~2002 ~~gross~~required ~~margin~~us ~~erosion.~~to ~~Certain~~change ~~costs~~or ~~were~~supplement ~~associated~~some ~~with~~of ~~inventory~~our corporate ~~that~~governance ~~had~~and ~~been~~securities ~~set~~disclosure ~~aside~~and ~~for~~compliance apractices. ~~specific~~The Securities ~~project~~and ~~that~~Exchange ~~was~~Commission ~~cancelled~~and ~~during~~NASDAQ ~~the~~have ~~quarter ended September 30~~revised, ~~2004.~~and Itcontinue ~~was also determined that the~~to ~~inventory~~ revise, ~~would~~their ~~not~~regulations beand ~~usable~~listing ~~in a replacement project~~standards. ~~This~~These ~~inventory~~developments ~~included~~have increased, ~~steel~~ and ~~restricted~~may ~~use~~continue ~~elevators that were not transferable~~ to ~~other~~increase, ~~projects.~~our ~~Other~~legal ~~steel~~compliance ~~inventory~~and ~~was written down when it was determined after the quarterly~~financial ~~inventory~~ reporting ~~that the specific lengths and specifications were not usable~~costs.

~~Another~~These developments ~~significant~~may ~~factor~~also inmake ~~the~~it ~~loss~~more ~~incurred~~difficult ~~during~~and ~~2004~~more ~~was~~expensive ~~the~~for ~~increased~~us ~~prices~~to ~~for~~obtain director ~~commodities~~and ~~such~~officer asliability ~~steel~~insurance, ~~lumber~~ and ~~plywood.~~we ~~Some~~may ~~steel~~be ~~components~~required ~~used~~to inaccept reduced ~~our~~coverage ~~products~~or ~~nearly~~incur ~~doubled~~substantially higher costs to obtain coverage. This, in ~~price~~turn, ~~during~~could ~~2004~~make it more difficult for us to attract and ~~overall~~retain qualified members of our ~~steel costs~~board ~~were~~of updirectors inor ~~excess~~qualified ofexecutive ~~30%~~officers.

~~Although~~Failure to wecomply ~~experienced~~with apresent ~~loss~~or infuture ~~2004~~laws, werules and regulations of any kind that ~~expect~~ govern ~~higher~~our ~~margins~~business could result in ~~the~~suspension ~~future~~of ~~because~~all ~~certain~~or ofa ~~the~~portion ~~events~~of production, wecessation ~~experienced~~of inall ~~2004~~or ~~are~~a ~~not~~portion ~~expected~~of toour ~~continue~~operations, ~~into~~or ~~2005.~~the Weimposition of dosignificant ~~not~~administrative, ~~anticipate~~civil, ~~commodity~~or criminal penalties.

16We have identified material weaknesses in our disclosure controls and procedures and our internal control over financial reporting, which, if not remedied effectively, could prevent us from reporting our financial results on a timely and accurate basis and result in a decrease in the trading price of our common stock and otherwise seriously harm our business.

~~Table~~Management through, in part, the documentation, testing and assessment of ~~Contents~~our internal control over financial reporting pursuant to the rules promulgated by the SEC under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K has concluded that our disclosure controls and procedures and our internal control over financial reporting had material weaknesses as of December 31, 2005, 2006 and 2007. We have taken certain actions to begin to address those material weaknesses, but as of December 31, 2007 had not yet completed our remediation efforts.

If ~~prices~~ we fail to ~~increase~~complete inour ~~2005~~remediation or if we complete the remediation but fail to maintain the adequacy of our internal controls, as ~~they~~such ~~did~~standards inare ~~2004~~modified, supplemented ~~and~~or amended from time to time, we ~~are~~may ~~attempting~~not be able to ~~negotiate~~ensure ~~the~~that we can ~~right~~conclude on an ongoing basis that we have effective internal control over financial reporting in ~~our~~accordance ~~new~~with ~~contracts~~Section 404 of the Sarbanes-Oxley Act. Failure to ~~pass~~achieve ~~future~~and ~~commodity~~maintain ~~price~~an ~~increases~~effective oninternal control environment could to prevent us from reporting our ~~customers.~~financial ~~Also,~~results weon ~~have~~a ~~shifted~~timely and accurate basis or cause investors to lose confidence in our ~~product~~reported ~~focus~~financial ~~away~~information. These ~~from~~effects ~~the~~could ~~lower~~in ~~margin~~turn ~~complex~~result ~~customized~~in ~~structures~~a todecrease in the ~~higher~~trading ~~margin~~price ~~standard~~of ~~buildings.~~our common stock.

InUntil we are ~~2004,~~able ~~selling,~~to ~~general~~remediate ~~and~~these ~~administrative~~material ~~(SG&A)~~weaknesses, ~~expenses~~there ~~increased~~remains ~~$6.4~~the ~~million~~risk ~~over~~ that the transitional ~~prior~~controls ~~year~~on ~~with~~which ~~SG&A~~we ~~costs~~currently ~~representing~~rely ~~7.8%~~will offail ~~net~~to ~~sales~~be ~~compared to~~sufficiently ~~5.1%~~ effective, ofwhich ~~net~~could ~~sales~~result in ~~the~~a ~~prior~~material ~~year.~~misstatement ~~This increase is attributable to costs~~ of ~~$2.1~~our ~~million associated with the senior management change that occurred in the quarter ended September 30, 2004, increased professional fees associated with compliance~~financial ~~with~~ position ~~the~~or ~~Sarbanes~~results ~~Oxley Act~~ of ~~2002,~~operations ~~professional~~ and ~~settlement~~require ~~fees~~a ~~associated~~restatement. ~~with~~If ~~certain~~this ~~benefits~~were ~~plans and~~ to occur, ~~increases~~investors ~~attributable~~may tonot ~~higher~~be ~~sales~~able ~~activities across the company. We expect~~ to ~~continue~~rely on the ~~higher~~financial ~~costs~~statements ~~associated with our~~contained ~~anticipated~~ in ~~growth.~~this WeForm ~~also~~10-K ~~expect~~filing. ~~Sarbanes~~In ~~Oxley~~addition, ~~compliance~~even ~~costs~~if towe ~~continue~~are ~~with~~successful ~~higher~~in strengthening ~~internal~~our ~~costs~~controls and ~~continued~~procedures, ~~costs~~such ~~associated~~controls ~~with~~and ~~independent~~procedures ~~testing.~~may not be ~~The~~adequate ~~costs~~to ~~associated~~prevent ~~with~~or ~~the~~identify ~~management~~irregularities ~~change~~or ~~and~~facilitate ~~certain~~the ~~professional~~fair presentation ~~and~~of ~~other fees~~our ~~are~~financial ~~not~~statements ~~expected~~or toSEC ~~recur~~reporting.

~~We recognized a gain of $745,000 on the sale of property in Florida in 2004.~~ 13

~~There was no impairment of goodwill recorded~~Costs ~~for~~ related ~~the~~to ~~year ended December 31, 2004 because~~ our ~~fair~~compliance ~~value~~with ~~(as~~Section ~~determined~~404 byof the ~~December~~Sarbanes-Oxley ~~31,~~Act ~~2004~~have ~~closing~~been significant ~~stock~~and ~~price) exceeded book value. In the future, goodwill~~ may becontinue ~~impaired by events or circumstances that lower the fair value below book value. These events or circumstances include, but are not limited~~ to, ~~things~~negatively ~~such~~impact asour ~~continued~~cash ~~operating~~flow ~~losses;~~and ~~unanticipated competition; a significant adverse change in legal factors or in the business climate; or other factors leading to a~~results ~~decline in estimated future cash flows~~ of operations.

InOur efforts ~~2004,~~to ~~net~~comply ~~interest~~with ~~expense~~Section 404 of the Sarbanes-Oxley Act of 2002 and the ~~increased~~ related ~~from~~regulations $1regarding our required assessment of our internal control over financial reporting and our independent registered public accounting firm’s audit of that assessment has required the commitment of significant financial and managerial resources.4 ~~million~~Our compliance efforts have resulted in, ~~2003~~and are likely to ~~$2.9~~continue ~~million~~to result in, ~~2004.~~increased ~~The~~general ~~increase~~and isadministrative ~~attributable~~expenses and toa ~~higher~~diversion ~~interest~~of ~~rates~~management time and aattention ~~significantly~~from ~~higher~~revenue-generating activities ~~average~~to ~~revolver~~compliance ~~usage~~activities. ~~due~~During 2004 and 2005 direct costs relating to ~~our~~Sarbanes-Oxley ~~operating~~compliance ~~losses~~were ~~during~~approximately ~~2004~~$750,000 and $500,000, respectively. ~~Also~~During ~~included~~2006 inand ~~2004~~2007 iswe ~~the~~did ~~amortization~~not incur significant costs related to Section 404 of ~~debt~~the ~~issuance~~Sarbanes-Oxley ~~costs~~Act of ~~$643~~2002 because,~~000~~ effective for the year ended December 31, 2005, we were no longer required to file as an accelerated filer. Although a ~~result~~management’s assessment of internal controls over financial reporting was required for the ~~partial~~year ~~extinguishment~~ended December 31, 2007, our independent registered public accounting firm’s audit of ~~the~~that ~~prior~~assessment ~~credit~~was ~~facility~~not atrequired ~~year~~to be included in our annual filings on Form 10-~~end~~K for the years ended December 31, 2005, 2006 and 2007. ~~Interest~~During ~~expense~~2008 ~~will~~we expect compliance costs to increase as our independent registered public accounting firm’s audit of management’s assessment is required to be ~~higher~~included in ~~2005~~our ~~due~~annual tofilings on Form 10-K for the ~~increased~~year ended December ~~debt~~31, 2008. Based on an anticipated increase in compliance costs, our cash flows and ~~increased~~results ~~interest~~of ~~rates.~~operations will likely continue to be negatively impacted.

We are ~~recognized~~underutilizing ~~$795,000~~our ofmanufacturing ~~other~~facilities ~~income~~and ~~related~~may continue to do so in the future. ~~settlement~~In the past we closed some of aour ~~lawsuit~~facilities wewhich ~~filed.~~may in the future result in our having inadequate facilities to meet an increase in demand for our products.

~~The~~During the ~~benefit~~past ~~for~~three ~~income~~years, ~~tax~~we ofhave ~~$0.1~~closed ~~million~~two ~~for~~manufacturing ~~the~~facilities ~~year~~in ~~ended~~California and ~~December~~one ~~31, 2004~~in ~~compares~~Texas toas a ~~provision~~result of ~~$0.9~~reduced ~~million~~demand for ~~the~~our ~~year ended December 31, 2003~~products. ~~Although~~We weare currently ~~expect~~underutilizing ~~to return to profitability in 2005, minimal tax benefit was recognized because~~ our ~~cumulative losses for the~~ three ~~years~~remaining ~~ended~~manufacturing ~~December~~facilities ~~31, 2004~~for ~~created~~ similar ~~significant~~reasons. ~~negative~~If ~~evidence~~this ~~that~~trend it is ~~more likely than~~ not ~~that~~reversed, weit will ~~not~~continue ~~be able~~ to ~~realize~~negatively impact our ~~net~~margins ~~deferred~~which ~~tax~~could ~~assets.~~inhibit Weour ~~were~~ability ~~not~~to ~~able~~fund tooperations ~~overcome~~and service ~~the~~our ~~negative~~debt. ~~evidence~~Conversely, ~~with~~if ~~the~~demand ~~objective~~for ~~positive~~our ~~evidence~~products ~~and~~increases ~~therefore~~in ~~recorded~~the afuture ~~valuation~~ our ~~allowance~~remaining ~~against~~manufacturing ~~our~~facilities ~~net~~may ~~deferred~~be ~~tax~~inadequate ~~assets~~to ofmeet ~~$7.3~~the ~~million~~demand. Our inability ~~2004~~to ~~effective~~generate ~~tax~~sufficient ~~rate~~manufacturing ~~was~~capacities ~~39.6%~~to ~~before~~meet ~~the~~future ~~deferred~~demand, either ~~tax~~through ~~asset~~our ~~valuation~~own ~~adjustment~~facilities ~~compared~~or tothrough ~~prior~~outsourcing ~~year~~to atthird ~~39.2%~~parties, could result ~~and~~in isour ~~expected~~inability to ~~remain~~fulfill ~~approximately~~orders ~~within~~or ~~this range~~require ~~for~~us ~~2005.~~to turn down orders.

~~YEAR~~We may ~~ENDED~~be ~~DECEMBER~~unable ~~31,~~to ~~2003~~hire ~~COMPARED~~sufficient TOnumbers ~~YEAR~~of ~~ENDED~~employees ~~DECEMBER 31,~~when ~~2002~~ needed.

~~Net~~Our assembly ~~sales~~line ~~for~~process ~~the~~requires ~~year~~a ~~ended~~significant ~~December~~number ~~31,~~of ~~2003,~~manufacturing ~~declined by $8.1 million~~employees, many orof ~~approximately~~whom ~~4.8%,~~are ~~when~~employed ~~compared~~at torelatively ~~the~~low ~~prior year~~wages. ~~The~~During ~~decrease~~certain inperiods, we have ~~2003~~experienced isdifficulty ~~attributable~~in tofinding ~~lower~~suitable ~~sales~~replacements offor ~~commercial~~our ~~and~~workforce when ~~industrial~~turnover ~~buildings,~~occurs. ~~reflecting~~Since the ~~general~~beginning ~~business~~of ~~decline~~2008, inwe ~~the~~have ~~non-residential~~reduced ~~building~~our ~~sector~~workforce by ~~and~~approximately ~~the overall~~30% ~~economy.~~because ~~Lower~~of low sales ~~were~~volume. ~~also~~We ~~impacted~~anticipate insales ~~the~~will improve ~~fourth~~throughout ~~quarter~~2008 byand ~~the~~that ~~shift~~we inwill ~~marketing~~need ~~approach~~to ~~for~~hire ~~non-classroom~~new ~~sales~~employees. asOur inability weto ~~moved~~hire ~~away~~and ~~from~~retain asufficient ~~reliance~~numbers onof amanufacturing ~~dealer~~employees at any ~~network~~of ~~and~~our ~~focused~~operating ~~more~~facilities oncould ~~direct~~result ~~sales~~in ~~for~~our ~~these~~inability ~~products.~~to Wefulfill ~~believe~~orders ~~that~~ or ~~the~~require ~~decline~~us into ~~sales~~turn ~~associated~~down ~~with~~orders ~~the~~which ~~shift~~could tohave ~~greater~~an ~~direct~~adverse ~~sales~~effect ison ~~temporary~~our business, asresults weof ~~develop~~operations ~~the~~and ~~necessary~~financial ~~sales network~~condition.

~~Gross~~Our share ~~profit~~price ~~for~~has ~~the~~been ~~year~~subject ~~ended December 31, 2003 was $11.9 million, a decrease of $11.3 million, or approximately 48.5%, when compared~~ to ~~the~~extreme ~~previous~~price ~~year.~~fluctuations ~~Gross~~and ~~profit as~~could abe ~~percentage of net sales decreased~~ subject to ~~7.5%~~such fluctuations in ~~2003~~the ~~from 13~~future.8% inStockholders ~~2002.~~could ~~The~~have ~~decrease~~difficulty ~~in gross profit was due to several factors~~trading shares.

~~Unplanned~~The market ~~costs~~price onfor ~~certain~~our ~~projects~~common ~~were~~stock ~~driven~~has bybeen ~~the~~and ~~transition~~may continue to ~~more~~be ~~complex,~~subject ~~multi-story~~to significant ~~projects~~price ~~that~~fluctuations. ~~accelerated~~Our ~~during~~stock ~~2003.~~price ~~With~~declined ~~these~~from ~~complex~~an ~~projects~~average price ~~accounting~~ of ~~for~~approximately ~~more~~$4.67 ~~than~~in ~~50%~~January of2007 ~~the~~to ~~net~~less ~~revenue~~than $1 in ~~2003,~~November and December of 2007.

17Price fluctuations could be in response to operating results, announcements of technological innovations, changes in legislative and educational policies or general market conditions. Additionally, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the price of our common stock.

~~Table~~In the past, securities class action litigation has often been instituted against a company following periods of ~~Contents~~volatility in the company’s stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management’s attention and resources.

~~up significantly over the prior year, we went through a significant learning curve, particularly for the on-site portion of the contracts.~~ 14

~~Unabsorbed~~In addition, ~~fixed~~the ~~and~~future ~~semi-variable~~sale ~~costs~~of ~~associated~~a ~~with~~substantial ~~the~~number ~~decline~~of inshares ~~production~~of ~~during~~common ~~the~~stock ~~fourth~~ by us ~~quarter~~or ~~contributed~~by ~~significantly~~our toexisting ~~the~~stockholders ~~decline~~may inhave ~~gross~~an ~~margin~~adverse ~~for~~impact ~~2003.~~on ~~Fourth~~the ~~quarter~~market price ~~sales~~of the shares of ~~$23~~common stock.1 ~~million~~There ~~were~~can ~~down~~be ~~$13.1~~no ~~million~~assurance ~~from~~that the ~~prior~~trading price ~~year~~of ~~fourth~~our ~~quarter.~~common stock will remain at or near its current level.

~~During~~The closing ~~2003~~price weof ~~closed~~our ~~three~~stock ~~leased~~has ~~facilities,~~been ~~consolidating~~below ~~three~~$1 ~~facilities~~for ~~into~~more ~~one~~than in30 ~~Florida~~consecutive business days and ~~two~~we ~~facilities~~are ~~into~~subject ~~one~~to inbeing ~~Arizona. These~~delisted ~~plant~~by ~~consolidations~~NASDAQ. ~~increased~~We ~~incremental~~may ~~costs~~decide to do ina ~~fiscal~~reverse ~~2003,~~stock assplit ~~compared~~ to ~~fiscal~~avoid ~~2002~~delisting.

InThe closing ~~2003,~~bid ~~selling,~~price ~~general~~of ~~and~~our ~~administrative~~stock ~~(SG&A)~~has ~~expenses~~been ~~increased~~below $01 since November 30, 2007.4 ~~million~~On January ~~over~~16, ~~the~~2008, ~~prior~~we ~~year~~received ~~with~~written ~~SG&A~~notice ~~costs~~from ~~representing~~The ~~5.1%~~Nasdaq ofStock ~~sales~~Market advising ~~compared~~us that we had until July 14, 2008 to ~~4.6%~~regain ofcompliance ~~sales~~with the ~~prior~~$1 minimum ~~year~~bid price rule or we will be delisted from The Nasdaq Global Market. To regain ~~This~~compliance, ~~increase~~the ~~was~~closing bid price of our common stock must meet or exceed ~~directly~~ $1.00 ~~attributable~~per toshare ~~increased~~for ~~sales~~a ~~activities~~minimum inof ~~the~~10 ~~Florida~~consecutive ~~classroom~~business ~~market~~days. ~~and~~Absent toa reverse stock split, we do not foresee regaining compliance with the ~~shift~~$1 tominimum ~~direct~~bid price ~~sales~~rule ~~for~~by ~~non-classroom~~July ~~sales~~14, 2008.

~~In 2002~~Alternatively, we inmay ~~accordance~~apply ~~with~~to ~~SFAS~~transfer ~~No.~~our ~~142,~~common westock ~~took~~to anThe ~~impairment~~Nasdaq ~~charge~~Capital toMarket ~~goodwill~~if we satisfy all of that market's requirements for initial inclusion (other than the $371 minimum bid price),~~289,000,~~ which ~~was~~we ~~recognized~~believe aswe ado. ~~cumulative~~If ~~effect~~we ofelect ato ~~change~~apply infor ~~accounting~~such ~~principle~~ a transfer inand if such application is approved, we will be afforded the ~~three~~remainder of ~~month~~a second 180 calendar day period ~~ended~~to ~~March~~regain ~~31,~~compliance ~~2002.~~with ~~Effective~~the ~~January~~minimum 1,bid price ~~2002~~rule wewhile ~~ceased~~listed ~~amortizing~~on ~~our~~The ~~goodwill~~Nasdaq ~~and~~Capital ~~continued~~Market. If we fail to ~~amortize~~regain compliance with the ~~covenants~~minimum ~~not~~bid toprice ~~compete~~rule wein ~~received~~the insecond ~~our~~180 ~~acquisitions~~day ofperiod, ~~businesses~~we will be ~~over~~delisted ~~their~~from ~~respective~~The ~~useful lives.~~Nasdaq InNational ~~2003,~~Market ~~covenant~~and ~~amortization~~trade ~~decreased~~on ~~$0.3~~the ~~million~~OTC asBulletin aBoard, provided ~~result~~one of ~~certain~~our ~~covenants~~market ~~not~~makers applies to ~~compete~~have ~~becoming~~our ~~fully~~common ~~amortized~~stock quoted on the OTC Bulletin Board. The ~~remaining~~OTC ~~covenants~~Bulletin Board is not toa ~~compete~~company ~~will~~listing beservice and companies ~~fully~~cannot ~~amortized~~apply infor ~~2006~~inclusion on the OTC Bulletin Board.

~~Net~~Our board of ~~interest~~directors ~~expense~~has ~~declined~~not ~~from~~yet ~~$1.6~~considered ~~million~~whether into ~~2002~~authorize a reverse stock split to regain compliance with the $1.4 ~~million~~minimum inbid ~~2003.~~requirement of The ~~decrease~~Nasdaq Stock ~~was~~ Market. ~~attributable~~While toa ~~repayments~~reverse onstock ~~long-term~~split ~~debt.~~can Asbring aus ~~percentage~~back into compliance, there are instances where the price per share of ~~net~~a ~~sales,~~company's ~~net~~common ~~interest~~stock ~~expense~~immediately after ~~decreased~~a toreverse ~~0.8%~~split indoes ~~2003~~not ~~from~~increase 1proportionately with the reverse split.0% Also, there is the risk that the increase in ~~2002.~~price per share following the reverse split will not be sustained for any significant period of time.

~~The~~We have ~~provision~~acquired ~~for~~and ~~income~~may ~~taxes~~continue ~~was $0.9 million for the year ended December 31, 2003, compared~~ to ~~$5.8~~acquire ~~million~~other ~~for~~companies ~~2002.~~and ~~Our~~may ~~effective~~be ~~tax rate decreased from 42.8% for~~unable ~~the year ended December 31, 2002~~ to successfully ~~39.2%~~integrate ~~for~~these ~~the~~companies ~~year~~into ~~ended December 31, 2003~~our operations. ~~The decrease in income taxes was attributed to the decrease in income before income taxes and a decrease in estimated taxes for tax settlements.~~

~~LIQUIDITY~~In the past, ~~AND~~we ~~CAPITAL~~have ~~RESOURCES~~expanded our operations through strategic acquisitions, and we may continue to expand and diversify our operations with additional acquisitions. We may not realize the anticipated benefit from any of the transactions we pursue. Regardless of whether we consummate any such transaction, the negotiation of a potential transaction as well as the integration of the acquired business could require us to incur significant costs and cause diversion of management’s time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, write-offs and other related expenses. If we are unsuccessful in integrating these companies into our operations or if integration is more difficult than anticipated our business, results of operations and financial condition could be harmed. Some of the risks that may affect our ability to integrate acquired companies include those associated with:

We· ~~have~~unexpected ~~funded~~losses ~~our~~of ~~operations~~key ~~and~~employees ~~capital~~or ~~expenditures~~customers mostly with cash generated internally by operations, and borrowings under various credit facilities as well as cash received from exercised options. During the year ended December 31, 2004 we used cash of ~~approximately $9.1 million for operations; for~~ the ~~years~~acquired ended December 31, 2003 and 2002, our operations provided cash in the amounts of approximately $14.1 million and $8.2 million, respectively. At December 31, 2004, we had $11.8 million in cash and cash equivalents and working capital of $11.6 million. company;

~~Cash~~· ~~increased~~conforming ~~over~~ the ~~prior~~acquired ~~year~~company’s ~~due to the sale of a senior secured~~standards, ~~convertible note presented in more detail below. Accounts receivable increased primarily due to the higher revenues occurring during the fourth quarter of 2004 compared to 2003~~processes, ~~resulting~~procedures ~~from favorable market conditions~~ and ~~recovery~~controls ~~over~~with ~~the~~our prior year. Inventories increased primarily due to increased purchases of steel during 2004 as we attempted to manage both price impact and possible shortages resulting from the world-wide steel commodity issues experienced throughout 2004. operations;

~~Current~~· ~~liabilities~~coordinating ~~increased~~new ~~during~~product ~~the fourth quarter of 2004 compared to 2003 due to an increase in accounts payable attributable primarily to increased volume inventory purchases~~ and aprocess ~~lengthening of payment terms and to an increase in current revolving credit.~~ development;

We· ~~had~~hiring ~~working~~additional ~~capital~~management ~~of $11.6 million, $21.5 million~~ and ~~$28.0~~other ~~million~~critical atpersonnel; ~~December 31, 2004, 2003~~ and ~~2002, respectively. In 2004, current assets increased by $24.4 million over the prior year, with an increase of $10.7~~

18· increasing the scope, geographic diversity and complexity of our operations.

~~Table~~Earthquakes or ofother ~~Contents~~natural disasters may cause us significant losses.

Our ~~million~~ corporate ~~in cash~~headquarters, ancertain ~~increase~~ of ~~$10.8~~our ~~million~~manufacturing infacilities ~~contracts receivable~~ and ancertain other ~~increase~~critical ofbusiness ~~$6.8~~operations ~~million~~are inlocated ~~inventory~~near ~~accounting~~major ~~for~~earthquake ~~the majority of the~~fault ~~increase~~ lines. ~~These~~We ~~increases~~do ~~were~~not ~~offset~~maintain byearthquake ainsurance ~~decrease~~and incould ~~current~~be ~~deferred~~harmed ~~tax~~in ~~assets~~the event of ~~$2.9~~a ~~million.~~major ~~Current liabilities increased by $34~~earthquake.3 ~~million~~We ~~for~~maintain ~~2004~~some ~~when~~business ~~compared~~interruption insurance to help reduce the ~~prior~~effect ~~year. This increase is primarily attributable to an increase~~ of ~~$14.0~~ ~~million~~such inbusiness ~~accounts payable~~interruptions, anbut ~~$8.5~~we ~~million~~are ~~increase~~not infully ~~current debt year-over-year, an increase of $4.2 million in accrued estimated future contract losses and $5.2 million in derivatives and warrants relating to a $25 million convertible~~insured ~~note~~ against ~~issued~~such ~~on December 31, 2004~~risks.

Our financial performance during 2004 resulted in the violation of certain bank covenants under our loan agreement during the year and at year-end for which we received a waiver from our lenders. On December 29, 2004 we entered into an Amendment and Forbearance Agreement with our existing senior lending group which provided for, among other things, relief from our financial covenants through March 31, 2005 to allow for refinancing our debt. At December 31, 2004, $16.9 million was outstanding under the revolving credit line and $5.0 million was outstanding under the term portion of the facility with the existing senior lending group. 15

OnAnti-takeover provisions ~~December~~in ~~31,~~our ~~2004,~~charter wedocuments ~~entered~~and ~~into~~under aDelaware ~~securities~~law ~~purchase~~may ~~agreement~~make ~~(the Agreement) with~~ an acquisition ~~institutional~~of ~~investor~~us, ~~pursuant to~~ which wemay ~~issued~~be ~~and~~beneficial ~~sold~~ to ~~the~~our ~~investor a~~stockholders, ~~$25 million convertible note (the Note) and a related warrant~~more difficult.

~~The principal~~We ~~owing~~ are incorporated ~~under~~in ~~the Note is due on December 31, 2009~~Delaware. ~~The~~Certain ~~Note~~anti-takeover ~~holder~~provisions ~~has the option to cause us to redeem up to $8.33 million face amount~~ of ~~the~~Delaware ~~Note on each of June 30 of 2006, 2007~~ law and ~~2008. The principal is payable in cash; provided, however, that~~ if our ~~senior~~charter ~~credit~~documents ~~facility~~as ~~would~~currently ~~prevent~~in ~~such~~effect ~~cash redemption, at our option, the principal~~ may bemake ~~repaid by converting the principal amount to be repaid into common stock at~~ a ~~conversion~~change ~~price~~in ofcontrol ~~95%~~ of ~~the arithmetic average trading price of~~ ~~the~~ our company ~~common~~more ~~stock~~difficult, ~~for~~even ~~a specified number of trading days prior to the scheduled principal payment date and~~ if ~~other~~a ~~specified~~change ~~conditions~~in ~~are~~control ~~satisfied,~~would ~~including~~be ~~compliance~~beneficial ~~with Nasdaq National Market regulations. We have the right~~ to ~~prepay the~~ ~~principal amount owing under~~ the ~~Note in cash after December 31, 2007 if certain conditions are met, among other things that the price of our common stock exceeds 175% of the Conversion Price~~ stockholders.

Our board of directors has the authority to issue additional shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The ~~Note~~rights ~~bears~~of ~~interest~~holders atof 7%our ~~per~~common ~~annum~~stock are subject to the rights of the holders of any preferred stock that may be issued. ~~Interest~~The onissuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the ~~Note~~holder ishas ~~payable~~held ~~quarterly~~the stock for three years unless, among other possibilities, the board of directors approves the transaction. Our board of directors may use these provisions to prevent changes in ~~cash~~the management and control of our company. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

~~The holder of the Note may convert the Note into common stock at any time or~~ITEM ~~from time-to-time at $8~~ 1B.70 ~~per~~UNRESOLVED ~~share~~STAFF (the Conversion Price). The Note has a weighted average anti-dilution provision that would cause an adjustment to the Conversion Price and the number of shares issuable under the Note upon the occurrence of specified events. COMMENTS

The Note contains restrictive covenants, including covenants that prohibit us from incurring certain indebtedness, establishing certain liens on our assets or issuing any variable priced securities. The terms of the Note require us to maintain certain financial ratios on a quarterly basis. The covenants are substantially similar to the covenants contained in our new senior credit facility. None

The Note is secured by a $10 million cash collateral account. The cash collateral is not accessible for use by us until such time as it is released. The cash held in the cash collateral account will be reduced as certain financialITEM ~~milestones are met and can be used, in part, to fund optional redemptions that may be exercised by the Note holder on June 30 of 2006, 2007 and 2008, or upon an “event of default” under the Note~~ 2. PROPERTIES

~~The~~Our principal ~~Note~~executive isand ~~also~~administrative ~~secured~~facilities byare alocated ~~security~~in ~~interest~~approximately 17,000 insquare ~~our~~feet ~~assets,~~of ~~subordinated~~modular ~~only~~buildings toat ~~certain~~our primary manufacturing facility ~~senior~~ located ~~indebtedness~~in Perris, ~~including~~California ~~our~~approximately ~~existing~~60 ~~credit~~miles east of Los Angeles. This manufacturing facility occupies approximately 25 acres, with ~~our~~approximately 226,000 ~~senior~~square ~~lenders.~~feet of covered production space under roof, pursuant to a lease expiring in 2019.

AsWe have two ~~part~~other ofmanufacturing ~~the~~facilities: ~~transaction,~~one wein ~~issued~~Phoenix, toArizona ~~the~~and ~~investor~~another ain Plant City, ~~five-year~~Florida, ~~warrant~~approximately to30 ~~purchase~~miles ~~shares~~northeast of ~~common~~Tampa. ~~stock~~Our ~~exercisable~~Phoenix, ~~for~~Arizona facility 8%consists of ~~the~~approximately ~~shares~~50,000 ~~underlying~~square ~~the~~feet ~~Note. The exercise price~~ of ~~the~~covered ~~warrant is equal to the Conversion Price. The~~production ~~warrant~~ space ~~may~~under ~~be exercised at any time after issuance and expires December 31~~roof, ~~2009.~~on ~~The warrant has~~ a ~~weighted average anti~~10-~~dilution~~acre ~~provision~~site, ~~that~~pursuant ~~would~~to ~~cause~~a anlease ~~adjustment~~expiring toin ~~the~~2012. Our Plant ~~exercise price of~~City, ~~and~~Florida ~~number~~facility consists of ~~shares issuable under~~106,000 ~~the~~square ~~warrant upon~~feet ~~the~~on ~~occurrence~~a ~~of specified events~~17-acre site.

19We believe that our facilities are well maintained and in good operating condition, and meet the requirements for our immediately foreseeable business needs.

~~Table~~On November 1, 2006, we sold our Plant City facility to NL Ventures V, L.P. for $4.4 million. Concurrently with the sale of ~~Contents~~the property, we entered into a Lease Agreement with the purchaser’s assignee, NL Ventures V Plant City, L.P., pursuant to which we leased back the property for an initial term of 20 years. We have the option to extend the lease term for two additional terms of five years each.

We closed our ~~are~~Texas ~~required~~plant toin ~~seek~~the ~~stockholder~~first ~~approval~~quarter ~~prior~~of to2007 ~~any~~because ~~future~~of ~~issuance~~sluggish ofsales in the state and our ~~common~~ability, ~~stock~~in orsome ~~securities~~instances, ~~convertible into~~to ~~our~~source ~~common~~products ~~stock~~from ~~that~~other ~~would~~Modtech facilities ~~constitute~~or athird-party ~~dilutive~~manufacturers. ~~issuance~~We ~~under~~owned the ~~Note~~land and ~~warrant,~~building ~~with~~related to ~~certain~~our ~~exceptions~~steel ~~(such~~shop asin ~~issuances~~Texas ofand ~~common~~sold ~~stock~~this ~~under~~property ~~our~~during ~~stock~~2007 ~~option~~for ~~plans~~the or$0.6 million inapproximate ~~connection~~book ~~with~~value ~~any~~of ~~acquisition~~the inassets. anWe ~~amount~~did not toincur ~~exceed~~any ~~20%~~material of costs ~~the~~associated ~~outstanding~~with ~~shares~~exit ofor ~~common~~disposal ~~stock in any twelve month period)~~activities.

OnDuring ~~February 25,~~ 2005, we ~~entered~~closed ~~into~~and asubsequently ~~Financing~~subleased ~~Agreement~~a ~~(the New Credit Facility) with Fortress Credit Corp.~~400,000 assquare ~~administrative~~foot ~~and collateral agent~~manufacturing facility, ~~and~~on ~~certain~~a ~~senior~~30-acre ~~lenders~~site ~~as identified~~ in ~~the~~Lathrop, ~~New Credit Facility~~California. The ~~New~~sublease ~~Credit~~runs ~~Facility~~through ~~provides~~ the ~~$17~~term ~~million~~of inthe ~~revolving~~master ~~credit~~lease ~~loans~~until (2019. During the ~~Revolving~~year, ~~Credit~~we ~~Loan)~~also ~~and~~closed a manufacturing ~~$21~~facility ~~million~~in ~~term~~Perris, ~~loan~~California ~~(the~~by ~~Term~~returning ~~Loan).~~the ~~The~~facility ~~Revolving~~to ~~Credit~~our landlord ~~Loan~~and ~~also~~amending ~~provides~~our ~~for~~lease awith ~~letter~~the oflandlord ~~credit~~to ~~subfacility~~include inonly the ~~maximum~~vacant property ~~amount~~that ofwe ~~$10~~retained ~~million~~for storage use. The ~~New~~amended ~~Credit Facility~~lease isexpires ~~secured by substantially all of our assets~~in 2015.

The ~~Revolving Credit~~ ~~Loan~~ California ~~will~~plants ~~bear~~were ~~interest~~closed atbecause athey ~~variable~~represented ~~rate~~excess ofcapacity ~~3.75%~~and, in the tocase ~~4.75%~~of ~~per~~the ~~annum~~Perris ~~plus~~facility, ~~the~~we ~~greater~~would ofhave 5%been orrequired ~~JPMorgan~~by ~~Chase~~the ~~Bank’s~~city ~~prime~~to make extensive ~~rate.~~improvements ~~Interest~~to isthe ~~payable monthly~~property. The ~~Term~~landlord ~~Loan~~we ~~will~~returned ~~bear interest at~~ the ~~30-day~~facility to in ~~LIBOR~~Perris ~~rate~~joined ~~plus~~with aone ~~variable rate~~ of ~~7.5%~~ toour ~~8.5%~~former ~~per~~executive ~~annum~~officers ~~payable~~in ~~monthly.~~opening ~~The~~a competing ~~variable~~modular ~~rates~~manufacturing ~~depend~~business onat ~~our~~the ~~senior secured leverage ratio~~facility.

Amounts owed under the New Credit Facility may be accelerated under various circumstances more fully described in the New Credit Facility, including, but not limited to, the failure to make principal or interestITEM payments due under the New Credit Facility, breaches of certain covenants, representations and warranties set forth in the New Credit Facility, the occurrence of certain insolvency or receivership events affecting us and certain events having a material adverse effect on our business, assets, operations or condition taken as a whole 3. LEGAL PROCEEDINGS

~~The~~On September ~~New~~26, ~~Credit~~2005, ~~Facility~~we ~~contains~~filed ~~customary~~lawsuit ~~affirmative~~against ~~and~~the ~~negative~~Campbell ~~covenants~~Union Elementary School District (the “District”) in the California Superior Court for ~~credit~~Santa Clara ~~facilities~~County. ofIn ~~this~~an ~~type,~~amended ~~including~~pleading, ~~without~~we ~~limitation~~have asserted that the District improperly terminated our contract and that we are entitled to damages for breach of contract. Pursuant to our contract with the District entered into in October 2003, ~~restrictions~~we onsubmitted our ~~ability~~plans for a two-story building with a design methodology that was pre-approved by the Division of State Architect (“DSA”) and in accordance with the contract documents. The District submitted the plans to the DSA’s Oakland regional office which unexpectedly refused to approve the plans. The District refused to grant us an extension of time to resolve this issue with the DSA Oakland regional office despite the fact that our contract provided for such an extension for District caused delays and for unforeseen events. The District declared us in default in December 2004, ~~among~~and ~~other~~on ~~things~~May 3, 2005, ~~incur~~the ~~debt~~District made a demand upon our bonding company, ~~create~~Liberty Mutual ~~liens~~ (“Liberty”), ~~make~~to ~~investments,~~complete ~~pay~~the ~~dividends~~contract. On May 16, ~~sell~~2005 ~~assets~~DSA directed its Oakland office to accept our design methodology as originally submitted. Liberty took over the project in June 2005, ~~undertake~~and ~~transactions~~we entered into an agreement with ~~affiliates~~Liberty to complete the work on the project, reserving our rights and ~~enter~~claims ~~into~~against ~~unrelated~~the District. ~~lines~~The ofproject ~~business~~has now been completed. A trial date has not yet been established by the court, but is expected to be scheduled by the end of 2008.

In connection with the New Credit Facility, on February 25, 2005, we terminated our existing credit agreement with Wells Fargo, N.A., as administrative agent and the lenders that were parties to such agreement (the “Prior Credit Facility”). We paid off all amounts borrowed and due under the Prior Credit Facility, which aggregated approximately $22.3 million. We did not incur any penalties in connection with the termination of the Prior Credit Facility. 16

~~Capital expenditures~~On ~~amounted~~ January to25, ~~$1.4~~2006, ~~million~~a class action lawsuit was filed against us and Bayside Solutions, $4Inc.7 ~~million~~by TRICO Pipes, Aram Hodess, Micah Long and $1the Plumbers and Steamfitters Local Union No.1 ~~million~~159 ~~during~~in the ~~years~~California ~~ended~~Superior ~~December~~Court ~~31,~~for ~~2004,~~Alameda County ~~2003~~on ~~and~~behalf ~~2002,~~of ~~respectively.~~those Inpersons ~~all~~we ~~three~~employed ~~years~~on California public work projects from January 25, 2002 to the ~~majority~~filing of ~~expenditures~~the ~~were~~complaint. aThe ~~result~~complaint ofalleges that we ~~expanding~~failed ~~production~~to ~~capacity~~pay atthese ~~our~~individuals ~~various~~general ~~facilities~~prevailing wage rates, overtime rates, and required rates for holiday work. It also alleges that we failed We to employ ~~expect~~registered apprentices, thereby denying such apprentices the opportunity to ~~expend~~earn ~~approximately~~wages. $5Bayside Solutions, Inc.0 ~~million~~is a temporary labor service used by us and TRICO Pipes is a joint labor management committee in ~~capital~~the ~~projects~~plumbing and pipe fitting industry in ~~2005~~Contra Costa County. The court has not yet certified the class.

The complaint ~~Company~~seeks ~~has~~restitution ~~suffered~~for aall ~~significant~~underpayments ~~operating~~of ~~loss~~wages, asattorney’s ~~well~~fees ~~as negative operating cash flow in the latest fiscal year~~ and ~~continues to be subject to certain risks common to companies in this industry as further described in “Factors~~ ~~That Could Affect Future Results~~ costs.” ~~Our~~We ~~financial~~reassert ~~performance~~our ~~for~~denial of the ~~quarter~~liability, ~~ended~~but ~~March~~cannot ~~31,~~predict ~~2005~~with ~~resulted~~any certainty in the ~~violation~~outcome of ~~certain financial covenants within~~ the ~~New~~proceeding. ~~Credit~~This ~~Facility~~is ~~and,~~especially ~~thru~~true ~~cross~~since ~~default provision, the Note. We have~~until ~~obtained~~ any class ~~waivers~~is ~~for~~defined, ~~all~~it ~~such~~is ~~covenant~~impossible ~~violations~~to atdefine ~~March~~what ~~31,~~the ~~2005~~class ~~and~~or claims are ~~still able~~ going to ~~borrow under the facility~~be. ~~However,~~We we are inunable ~~discussions~~to ~~with~~ascertain ~~our~~at ~~lenders~~this ~~regarding~~time ~~amendments to~~ the ~~New~~potential ~~Credit~~monetary ~~Facility~~liability or infinancial ~~order~~impact to ~~avoid~~us ~~possible~~should ~~future violations.~~there ~~Based~~be ~~upon~~an ~~our~~unfavorable ~~discussions,~~settlement ~~any~~or ~~covenant~~adverse decision, ~~amendments~~but towe ~~the~~believe ~~New~~that ~~Credit~~either ~~Facility~~event ~~will~~could behave ~~conditioned~~a ~~upon~~material ~~the~~effect ~~closing~~on our operations ofor ~~the~~financial ~~financing described below~~position.

ToExcept for ~~strengthen~~the ~~our~~two ~~financial~~proceedings ~~condition~~described above, we ~~have~~are ~~been~~not ~~exploring~~involved ~~additional~~in ~~financing~~any ~~opportunities~~legal proceedings ~~and~~other inthan ~~this~~ordinary ~~regard~~routine ~~executed~~litigation aincidental ~~nonbinding~~to our business, ~~term~~ including ~~sheet~~product onliability, ~~June~~employment 14disputes, ~~2005~~administrative ~~for~~proceedings and commercial alitigation. ~~private~~Such ~~placement~~proceedings ofoften ~~equity~~do ~~securities~~not inspecify the ~~aggregate~~ amount of damages ~~$11.7~~sought, ~~million.~~and ~~Pursuant~~their tooutcomes ~~the~~are ~~term~~not ~~sheet~~predictable. Consequently, ~~the~~we ~~investors~~are unable ~~will~~to ~~purchase~~ascertain ~~shares~~the ofultimate ~~the~~aggregate ~~Company’s~~amount ~~common~~of ~~stock~~monetary atliability ~~$5.67~~or financial ~~per~~impact ~~share,~~with ~~based~~respect onto ~~85%~~these ~~of the~~routine ~~average~~pending ~~closing~~proceedings. ~~price~~While ~~for~~they could ~~May~~affect ~~26,~~operating ~~2005~~results ~~thru~~of ~~June~~any 2,one ~~2005.~~quarter ~~The~~when ~~stock~~resolved ~~will~~in ~~include~~future periods, ~~five-year~~it ~~warrants~~is tomanagement’s ~~purchase~~opinion ~~additional~~that, ~~shares~~after ~~equal~~final todisposition, ~~one-half~~any ~~the~~monetary liability ~~number~~or offinancial ~~shares~~impact ~~initially~~to ~~sold.~~us ~~The~~from ~~warrants~~these ~~will~~routine ~~have~~proceedings anbeyond ~~exercise~~that provided ~~price~~for ofat ~~$8.00~~year-end ~~per~~would ~~share. We~~not ~~expect~~be material to ~~close~~our ~~this~~financial ~~transaction~~position inor results ~~July~~of ~~2005~~operations.

~~Although we believe that we~~ITEM ~~will~~ 4. beSUBMISSION ~~successful~~OF inMATTERS ~~closing~~TO ~~the~~A ~~private~~VOTE ~~placement~~OF ~~and~~SECURITY ~~in obtaining covenant amendments, there can be no assurance that these events will occur or occur on favorable terms.~~ HOLDERS

20 None

~~Table of Contents~~17

~~COMMITMENTS AND CONTINGENCIES~~ PART II

~~The~~ITEM 5. ~~following~~MARKET ~~table~~FOR ~~represents~~REGISTRANT’S aCOMMON ~~list~~EQUITY, ofRELATED ~~our~~STOCKHOLDER ~~contractual~~MATTERS, ~~obligations and commitments as of~~AND ~~December~~ ISSUER ~~31,~~PURCHASES ~~2004:~~OF EQUITY SECURITIES

	Payments Due by Year (amounts in thousands)
	Total		2005		2006		2007		2008		2009		Thereafter
Long-term debt	$	25,000		—		—		—		—	$	25,000		—
Operating leases		13,526	$	1,538	$	1,538	$	1,460	$	1,033		1,009	$	6,948
Total contractual cash obligations	$	38,526	$	1,538	$	1,538	$	1,460	$	1,033	$	26,009	$	6,948

Our common stock is traded on the NASDAQ Global Market under the symbol “MODT”. The range of high and low sales prices for the common stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below, are as follows:

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Fiscal Year 2007 Quarters Ended	High		Low
March 31, 2007	$	5.53	$	2.95
June 30, 2007		3.39		2.47
September 30, 2007		2.98		1.03
December 31, 2007		2.00		0.63

In December 2001, the Securities and Exchange Commission (SEC) requested that all registrants list their most “critical accounting policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management continually evaluates its estimates and assumptions including those related our most critical accounting policies. Management bases its estimates and assumptions on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Changes in economic conditions could have an impact on these estimates and our actual results. Management believes that the following may involve a higher degree of judgment or complexity:

Fiscal Year 2006 Quarters Ended	High		Low
March 31, 2006	$	9.49	$	6.93
June 30, 2006		10.95		6.17
September 30, 2006		7.74		5.00
December 31, 2006		5.69		4.27

~~Allowances~~On March 27, 2008, the closing sales price on the NASDAQ Global Market for ~~Contract~~a ~~Adjustments~~share of our common stock was $0.31. The approximate number of holders of record of our common stock on February 29, 2008, was 64.

WeOn January ~~maintain~~16, ~~allowances~~2008, ~~for~~we ~~contract~~received ~~adjustments~~a ~~that~~letter ~~result~~ from ~~the~~The ~~inability~~Nasdaq ofStock ~~our~~Market ~~customers to make their required payments. Management bases its allowances on~~notifying ~~analysis~~ us that offor the ~~aging~~30 ofconsecutive ~~accounts~~business ~~receivable,~~days bypreceding ~~account, at~~ the date of the ~~financial~~letter the bid ~~statements,~~price ~~assessments~~ of ~~historical~~our ~~collection~~common ~~trends,~~stock ~~and~~had anclosed ~~evaluation~~below of the ~~impact~~$1.00 ofper ~~current~~share ~~economic~~minimum bid price ~~conditions.~~required Iffor ~~the~~continued ~~financial~~inclusion ~~condition~~on ofThe ~~our customers~~Nasdaq ~~were~~Global Market pursuant to Nasdaq ~~deteriorate,~~Marketplace ~~resulting~~Rule in4450(a)(5). anThis ~~impairment~~notification ofhas ~~their~~no ~~ability~~effect toon ~~make~~the listing ~~payments,~~of ~~additional~~our ~~allowances~~common ~~may~~stock beat ~~required~~this time.

~~Accrual~~In accordance with Nasdaq Marketplace Rule 4450(e)(2), we have 180 calendar days from the date of the Nasdaq letter, or until July 14, 2008, to regain compliance with the minimum bid price rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for ~~Worker’s~~a ~~Compensation~~minimum ~~Reserve~~of 10 consecutive business days. Nasdaq may, in its discretion, require us to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that we have demonstrated an ability to maintain long-term compliance. If compliance is not regained, Nasdaq will notify us of its determination to delist our common stock, which decision may be appealed to a Listings Qualification Panel.

We may alternatively ~~are~~apply ~~self-insured~~to ~~for~~transfer ~~workers~~our ~~compensation~~common ~~under~~stock ato ~~high~~The ~~deductible~~Nasdaq ~~program.~~Capital ~~Management~~Market if we ~~bases~~satisfy ~~its~~all ~~accrual~~of ~~estimate~~the onrequirements, ~~input~~other ~~from~~than the ~~insurance~~minimum ~~carrier~~bid ~~which~~price, ~~includes~~for ~~information~~ initial ~~regarding~~inclusion ~~open~~on ~~and~~this ~~closed~~market. ~~cases,~~If ~~historical~~we ~~costs~~elect ~~associated~~to ~~with~~apply ~~those~~for ~~claims,~~such ~~certain~~a ~~developed costs~~ transfer and if ansuch ~~estimate~~application ~~of Incurred But Not Reported (IBNR) claims. It~~ is ~~important~~approved, towe ~~recognize~~will ~~that~~be ~~variation~~afforded ~~from~~ the ~~estimates~~remainder of ~~future~~a second ~~liability~~ 180 ~~claims~~calendar isday ~~not~~period ~~only~~to ~~possible~~regain ~~but~~compliance ~~probable.~~with ~~The~~the ~~inherent~~minimum ~~variability~~bid ~~may~~price ~~result~~rule while inlisted ~~actual costs being either above or below the estimates recorded~~ on ~~our~~The ~~consolidated~~Nasdaq ~~financial~~Capital ~~statements~~Market.

~~Revenue Recognition on Construction Contracts~~ Dividend Policy

~~Contracts~~We have not ~~are~~paid ~~recognized~~a ~~using~~dividend ~~the~~on ~~percentage-of-completion~~common ~~method~~stock ofat ~~accounting~~any ~~and, therefore,~~time ~~take~~since ~~into~~1990. ~~account~~The ~~the~~Board ~~costs,~~of Directors ~~estimated~~currently ~~earnings~~intends ~~and revenue~~ to ~~date~~follow ona ~~contracts~~policy ~~not~~of ~~yet~~retaining ~~completed.~~all ~~Revenue~~earnings, ~~recognized~~if any, isto ~~that~~finance ~~percentage~~our ofcontinued ~~the~~growth ~~total~~and ~~contract~~development ~~price~~and ~~that~~does ~~cost~~not ~~expended~~anticipate paying tocash ~~date~~dividends ~~bears to anticipated final total cost, based~~ on ~~current~~our ~~estimates~~common ofstock ~~costs~~in tothe ~~complete~~foreseeable future. ~~The~~Our ~~percentage-of-completion~~current credit ~~methodology~~facility ~~generally~~prohibits ~~results in~~ the ~~recognition~~payment of ~~reasonably~~dividends. ~~consistent~~Any ~~profit~~future ~~margins~~determination as to ~~over~~ the ~~life~~payment of acash ~~contract.~~dividends ~~Cumulative~~will ~~revenues recognized may~~ be ~~less~~dependent orupon ~~greater~~our ~~than cumulative~~financial ~~costs~~ condition and ~~profits~~results ~~billed~~of atoperations, ~~any~~the ~~point~~provisions inof ~~time~~our ~~during~~then acurrent ~~contract’s~~credit ~~term.~~facilities, and ~~The~~other ~~resulting~~factors ~~difference~~deemed isrelevant ~~recognized~~by asthe ~~unbilled~~Board orof ~~deferred revenue~~Directors.

21 18

~~Table~~Securities Authorized offor ~~Contents~~Issuance Under Equity Compensation Plans

~~Any~~The following ~~estimation~~table ~~process,~~sets ~~including~~forth ~~that used in preparing contract accounting models, involves inherent risk. We reduce~~ the ~~inherent~~number ~~risk~~of ~~relating~~shares to ~~revenue~~be ~~and~~issued ~~cost~~upon ~~estimates in percentage-~~exercise of~~-completion~~ outstanding ~~models through corporate policy~~options, ~~approval~~the ~~and~~weighted-average ~~monitoring~~exercise ~~processes.~~price ~~Risks~~of ~~relating~~such ~~to project delivery~~options, ~~productivity~~ and ~~other factors are considered in the~~ ~~estimation process. Our estimates of revenues and costs on construction contracts change periodically in~~ the ~~normal~~number ~~course~~ of ~~business~~shares ~~due~~remaining toavailable ~~factors~~for ~~such~~issuance as ~~productivity and modifications~~ of ~~contractual arrangements. Such changes are reflected in~~ the ~~results~~end of ~~operations~~our most recently ascompleted afiscal ~~change in accounting estimate in the period the revisions are determined~~year. ~~Provisions for estimated losses are made in the period in which the loss first becomes apparent.~~

New Accounting Standards

	(a) Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights			(b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights			(c) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders		1,614,038	(1)	$	6.66	(2)		1,038,881
Equity compensation plans not approved by security holders		N/A			N/A			N/A

~~In November 2004, the Financial Accounting Standards Board~~ (~~FASB~~1) ~~issued~~Includes ~~Statement No. 151~~507,087 ~~“Inventory~~unvested ~~Costs”,~~shares ~~to clarify the accounting for abnormal amounts~~ of ~~idle~~restricted ~~facility~~stock ~~expense,~~issued ~~freight,~~pursuant handling costs and wasted material. This statement requires those items be recognized as current-period charges. The provisions of this statement shall be effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. We do not expect adoption of this statement to ~~have a material impact on~~ our ~~consolidated~~2002 ~~financial~~Stock ~~statements.~~Option Plan.

In(2) ~~December~~Because ~~2004,~~ the ~~FASB issued Statement No. 123R~~507,087 ~~Share-Based~~unvested ~~Payment,~~shares a revision to Statement No. 123, Accounting for Stock-Based Compensation. This statement replaces Statement No. 123 and supercedes APB No. 25. This statement addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. Statement 123R will require us to measure the cost of ~~employee~~restricted ~~services~~stock ~~received~~shares inissued ~~exchange~~pursuant ~~for an award of equity instruments based on the grant-date fair value of the award. We are required~~ to ~~adopt~~our ~~Statement~~2002 ~~123R~~Stock ~~effective~~Option ~~January~~Plan 1,do ~~2006~~not ~~and~~ have ~~two~~an ~~transition~~exercise ~~options under the new standard; however~~price, the ~~recognition~~shares ofare ~~compensation~~not ~~expense~~included isin the ~~same~~calculation ~~under both options. We believe the adoption~~ of ~~Statement~~weighted ~~123R~~average ~~may~~exercise ~~have a material effect on our financial results during the period of adoption, however, the full effect of adopting Statement 123R has not been determined~~price.

~~SEASONALITY~~ 19

~~Historically, our quarterly revenues have been highest in the second and third quarters of each calendar year because a large number of orders for modular classrooms~~ITEM ~~placed~~ 6. bySELECTED ~~school~~FINANCIAL ~~districts~~DATA ~~require~~(DOLLARS ~~that~~IN ~~classrooms be constructed~~THOUSANDS, ~~delivered~~EXCEPT ~~and~~PER ~~installed in time for the upcoming new school year which generally commences in September. We have typically been able to add employees as needed to respond to the~~SHARE ~~corresponding increases in manufacturing output required by such seasonality to meet currently foreseeable increases in this seasonal demand.~~ DATA)

~~Our~~The selected ~~first~~financial ~~and~~data ~~fourth~~presented ~~quarter~~below ~~revenues~~should ~~are~~be ~~typically~~read ~~lower~~in ~~due~~conjunction towith “Management’s ~~greater~~Discussion ~~number~~and Analysis of ~~holidays~~Financial Condition and ~~days~~Results of Operations” ~~inclement~~and ~~weather~~our ~~during~~consolidated ~~such~~financial ~~periods~~statements and the notes thereto included elsewhere in this report. InThe ~~addition~~consolidated statements of income data for the years ended December 31, 2007, 2006 and 2005, and the consolidated balance sheet data at December 31, 2007 and 2006, are derived from our ~~operating~~audited ~~margins~~ consolidated ~~may~~financial ~~vary~~statements onappearing aelsewhere ~~quarterly~~in ~~basis~~this ~~depending~~Form ~~upon~~10-K. ~~the~~The consolidated ~~mix~~statements of ~~revenues~~income ~~between~~data ~~standardized~~for ~~classrooms~~the ~~and~~years ~~higher~~ended ~~margin~~December 31, 2004 ~~customized~~and ~~classrooms~~2003, and the ~~timing~~consolidated ofbalance ~~the~~sheet ~~completion~~data ofat ~~large~~December 31, ~~higher~~2005, 2004 ~~margin~~and ~~customized~~2003, ~~contracts~~are derived from our audited consolidated financial statements that are not included in this Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.

We anticipate a smoothing of this seasonality due to the growing impact of multi-year contracts and increased sales outside the traditional classroom market. However, these factors will not fully offset the impact of inclement weather and concentrations of holidays. So although the impact of seasonality is expected to be diminished, revenue and margins in the first and fourth quarters will likely be lower than in the second and third quarters.

	Year ended December 31,
	2007			2006			2005			2004			2003

Net sales	$	87,323,000		$	156,033,000		$	230,324,000		$	185,194,000		$	159,870,000
Cost of goods sold		93,223,000			151,655,000			221,376,000			188,114,000			147,938,000

Gross (loss) profit		(5,900,000	)		4,378,000			8,948,000			(2,920,000	)		11,932,000

Selling, general and administrative expenses		15,383,000			17,326,000			15,945,000			14,524,000			8,208,000
Impairment loss on goodwill		38,303,000			33,600,000			-			-			-
(Gain) loss on sale of property and equipment		(55,000	)		95,000			(6,000	)		(745,000	)		1,000

(Loss) income from operations		(59,531,000	)		(46,643,000	)		(6,991,000	)		(16,699,000	)		3,723,000

Other (expense) income:
Interest expense		(1,919,000	)		(2,479,000	)		(6,927,000	)		(1,663,000	)		(1,444,000	)
Interest income		238,000			326,000			358,000			31,000			85,000
Loss on extinguishment of debt		-			(3,421,000	)		-			-			-
Gain (loss) on warrant and embedded derivatives		7,657,000			6,959,000			(5,804,000	)		-			-
Amortization of debt costs		(628,000	)		(1,384,000	)		(1,037,000	)		(1,204,000	)		-
Accretion of convertible debt discount		(2,827,000	)		(3,740,000	)		(1,064,000	)		-			-
Early debt conversion fee		-			(4,716,000	)		-			-			-
Other income, net		102,000			407,000			361,000			881,000			31,000

		2,623,000			(8,048,000	)		(14,113,000	)		(1,955,000	)		(1,328,000	)

(Loss) income before income taxes		(56,908,000	)		(54,691,000	)		(21,104,000	)		(18,654,000	)		2,395,000
Income tax benefit (provision)		-			-			-			108,000			(938,000	)

Net (loss) income		(56,908,000	)		(54,691,000	)		(21,104,000	)		(18,546,000	)		1,457,000
Series A preferred stock dividend		-			-			-			221,000			7,000

Net (loss) income applicable to common shareholders	$	(56,908,000	)	$	(54,691,000	)	$	(21,104,000	)	$	(18,767,000	)	$	1,450,000

Basic (loss) earnings per common share	$	(2.66	)	$	(2.96	)	$	(1.35	)	$	(1.35	)	$	0.11

Basic weighted-average shares outstanding		21,355,000			18,465,000			15,682,000			13,949,000			13,708,000

Diluted (loss) earnings per common share	$	(2.66	)	$	(2.96	)	$	(1.35	)	$	(1.35	)	$	0.10

Diluted weighted-average shares outstanding		21,355,000			18,465,000			15,682,000			13,949,000			14,122,000

INFLATION

	Year ended December 31,
	2007		2006		2005		2004		2003
Balance Sheet Data:
Working capital	$	12,146,000	$	26,320,000	$	3,194,000	$	12,207,000	$	22,127,000
Total assets		47,220,000		122,810,000		181,833,000		179,792,000		146,209,000
Total liabilities		34,148,000		55,969,000		97,272,000		87,217,000		39,188,000
Long-term debt, excluding current portion		10,209,000		10,326,000		14,628,000		19,756,000		6,000,000
Shareholders' equity		13,072,000		66,841,000		84,561,000		92,575,000		107,021,000

We are subject to the effects of changing prices. During 2004, we realized dramatic and unprecedented increases in the price of certain commodities used in the production of our products, in particular steel, dimensional lumber

	Year ended December 31,
	2007			2006			2005			2004			2003
Selected Operating Data:
Gross (loss) margin		-6.8	%		2.8	%		3.9	%		-1.6	%		7.5	%
Operating (loss) margin		-68.2	%		-29.9	%		-3.0	%		-9.0	%		2.3	%
Backlog at period end	$	80,000,000		$	60,000,000		$	81,000,000		$	172,000,000		$	115,000,000

22 20

~~Table~~ITEM 7. ofMANAGEMENT’S ~~Contents~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and plywood products. While the cost outlook for commodities used in our production is not certain, management believes it can manage these inflationary pressures with sales price adjustments as allowed by our newer contracts and by actively pursuing internal cost reduction efforts, including improved supply chain and inventory management. Overview

~~FACTORS~~Modtech manufactures ~~THAT~~and ~~COULD~~sells ~~AFFECT~~modular ~~FUTURE~~relocatable ~~RESULTS~~classrooms and commercial and light industrial modular buildings. We are a leading provider of modular classrooms in California and Florida and a significant provider of commercial and light industrial modular buildings in California, Florida, Arizona, Nevada and other neighboring states.

~~Our~~In California ~~business~~and isFlorida, ~~subject~~we tomarket aand ~~number~~sell ofour ~~business~~modular ~~risks~~classrooms ~~and~~to ~~uncertainties that could impact~~school ~~the~~ districts. ~~accuracy~~Virtually all of ~~any~~our ~~future~~classroom ~~looking~~sales ~~statements~~are independent ~~this~~upon ~~report~~public funding. ~~and~~Such ~~cause~~funding ~~actual~~is ~~results~~sourced toin ~~differ~~multiple ~~materially~~ways ~~from~~which ~~those~~are ~~projected~~strongly orinfluenced by ~~anticipated.~~educational ~~These~~policies ~~risk~~that ~~and uncertainties include, but~~ are ~~not~~subject ~~limited~~ to ~~the~~political ~~following:~~ factors.

•The modular ~~Losses—Liquidity~~relocatable classroom industry is highly competitive with the market divided among a number of privately-owned companies whose share of the market is smaller than ours. The nonresidential modular building industry is highly competitive and fragmented. It is composed primarily of regionally based private companies, each with a single manufacturing facility.

WeA total of ~~experienced~~approximately ~~significant~~$2.2 ~~operating~~million ~~losses~~ in ~~2004~~change asorders ~~well~~on asthree ~~negative~~school ~~operating~~projects ~~cash~~in California ~~flow~~are ~~for~~included ~~the~~in ~~year~~both revenue and ~~may~~cost ~~experience~~of ~~future~~sales ~~operating~~for ~~losses~~2007. ~~and~~A ~~negative~~total of approximately ~~operating~~$3.5 ~~cash~~million ~~flow.~~in ~~Future~~change ~~losses~~orders oron ~~negative~~six ~~operating cash~~school ~~flow~~projects ~~may~~in ~~adversely~~California are ~~affect~~included ~~our~~in ~~liquidity~~both revenue and ~~ability~~cost toof ~~obtain~~sales ~~bonding~~for 2006. WeA ~~have~~total ~~been~~of approximately ~~negotiating~~$2.4 ~~for~~million ~~additional~~in ~~financing~~change inorders ~~2005.~~on ~~Although~~one weschool ~~signed~~project ain ~~non-binding~~California are ~~term~~included ~~sheet~~in onboth ~~June~~revenue ~~14,~~and ~~2005~~cost of sales for a2005. ~~private~~These ~~placement~~change oforders represent ~~common~~incremental ~~stock~~work ~~and~~that ~~warrants in~~was outside the ~~aggregate~~original ~~amount~~contract. ofThe ~~$11.7~~contract calls ~~million,~~for ~~there~~this iswork noto ~~assurance~~be ~~that~~completed and the ~~transaction~~change ~~will~~orders ~~close.~~submitted ~~Because~~for approval and payment after the ~~stock~~completion ~~will~~of bethe ~~sold~~work. atWe $5complied with this requirement.67 Although ~~per~~the ~~share~~change orders remain unapproved, ~~the~~we ~~transaction~~believe ~~will~~it beis ~~dilutive~~probable tothat these ~~existing~~costs ~~shareholders.~~will be recovered.

•In the first ~~Availability~~quarter of ~~Funding~~2007 we closed our Glen Rose, Texas manufacturing facility. We moved much of our Texas inventory and fixed assets to our other factories. We owned the land and building related to our steel shop in Texas, which is adjacent to the Glen Rose facility. We sold the steel shop during 2007 for the $0.6 million approximate book value of the assets. We did not incur any material costs associated with exit or disposal activities related to the closure of the Glen Rose facility.

The availability of funding for new school construction and rehabilitation of existing schools by school districts is subject to financial and political considerations which vary from district to district and is notResults ~~tied to demand. In the past, the level~~ of funding available from the states in which we do business to the school districts which are the end customers of our classrooms have caused such districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations. Operations

•The following ~~Concentration~~table sets forth, for the periods indicated, the percentages of ~~Customers~~net sales represented by certain items in our statements of operations.

We receive a significant portion of our revenues from the sale of classrooms to California school districts, to leasing companies that lease to such school districts and to a small number of independent dealers. The loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position.

	Percent of Net Sales
	Year Ended December 31,
	2007			2006			2005
Net sales		100.0	%		100.0	%		100.0	%
Cost of goods sold		106.8			97.2			96.1
Gross (loss) profit		(6.8	)		2.8			3.9
Selling, general and administrative expenses		17.6			11.1			6.9
Impairment loss on goodwill		43.9			21.5			-
(Gain) loss on sale of property and equipment		(0.1	)		0.1			(0.0	)
Loss from operations		(68.2	)		(29.9	)		(3.0	)
Other (expense) income:
Interest expense		(2.2	)		(1.6	)		(3.0	)
Interest income		0.3			0.2			0.2
Loss on extinguishment of debt		-			(2.2	)		-
Gain (loss) on warrant and embedded derivatives		8.8			4.5			(2.5	)
Amortization of debt costs		(0.7	)		(0.9	)		(0.5	)
Accretion on convertible debt discount		(3.2	)		(2.4	)		(0.5	)
Early debt conversion fee		-			(3.0	)		-
Other income, net		0.1			0.3			0.2
Loss before income taxes		(65.2	)		(35.1	)		(9.2	)
Income tax benefit		-			-			-
Net loss		(65.2	)%		(35.1	)%		(9.2	)%

~~• Raw Material Price Increases~~21

WeYear Ended ~~are~~December ~~not~~31, ~~always~~2007 ~~able~~Compared to ~~obtain~~Year ~~the~~Ended ~~right~~December ~~in our contracts to pass through raw material price increases to our customers. Should we experience significant increases in the price of raw materials as we did in 2004~~31, ~~our profitability could be adversely affected.~~ 2006

~~• Change in Product Demand~~Net Sales

~~Prior~~Net sales for ~~to 2002,~~ the ~~demand~~year ~~from~~ended ~~school~~December ~~districts~~31, ~~was~~2007 ~~mostly~~decreased ~~for~~to ~~standardized~~$87.3 ~~buildings~~million ~~which~~from we$156.0 million ~~were~~for ~~experienced~~2006, ina ~~assembling~~decrease inof ~~our factories~~$68.7 Inmillion ~~the~~or ~~last~~44.0%. ~~two~~When ~~years,~~compared ~~the demand shifted~~ to ~~more~~the prior ~~complex~~year, ~~customized buildings~~in ~~which~~2007 ~~required~~California ~~more~~sales ~~on-site~~of ~~work~~$57.4 ~~Initially,~~million we were ~~not~~down as35.6%; ~~experienced~~Florida sales ~~in this type~~ of ~~work~~$13.2 asmillion we were indown ~~the~~63.5%; ~~factory~~Arizona ~~construction~~sales of ~~standardized buildings~~$16.7 Inmillion ~~some~~were down 20.6% ~~cases,~~and ~~this~~Texas ~~resulted~~sales indecreased ~~inefficiencies~~from ~~on our part~~$9.8 Wemillion ~~believe~~in we2006 ~~now have~~to ~~sufficient~~zero ~~expertise~~in ~~and~~2007 ~~experience~~ due to ~~handle~~ the ~~current~~closure ~~demand for customized buildings, but should the type~~ of ~~buildings demanded by~~ our ~~customers~~manufacturing ~~change~~facility ~~again,~~in ~~we may, for a time, experience inefficiencies that could reduce profitability~~2007.

•The decrease ~~Plant~~in ~~Closure~~sales in 2007 in California was primarily due to a general slowdown in the education and commercial markets. The change in the education market is caused primarily by delays imposed by our customers on various large educational projects, a relative flattening of California school enrollment in recent years and general economic conditions. The decrease in the commercial market can be attributed to the slowdown in the construction and housing markets.

WeIn addition, ~~closed~~we believe that the demise of the “piggyback” contracting system in California in the prior year continued to have an adverse affect on our ~~plant~~sales volume in ~~Lathrop~~2007. Prior to January 27, 2006, many school districts in California utilized piggyback contracts which allowed them to order buildings based on contracts ~~April~~bid 30and entered into by builders, ~~2005.~~including ~~The~~Modtech, ~~effect~~with ofother ~~this~~school districts. ~~closure~~Since ~~will~~January ~~increase~~27, ~~our~~2006, ~~transportation~~these ~~costs~~piggyback ~~for~~contracts ~~jobs~~have innot ~~Northern~~been allowed in California school facilities procurement. ~~This~~As ~~increase~~a inresult, ~~costs~~the ~~could~~system allows ~~reduce~~more ~~our~~public ~~ability~~bids for the same volume of work. The change to the public ~~obtain~~ bidding ~~future~~process ~~work~~has resulted in ~~Northern~~increased ~~California~~competitive orpressures tobecause ~~complete~~smaller contractors ~~any~~are ~~jobs~~able ~~obtained~~to atbid ~~prior~~on ~~profit~~more ~~margins~~contracts. IfIn wethe ~~are~~first ~~unable~~half of 2006, much of the revenue was realized under the old piggyback contracting system due to the ~~effectively~~long-term ~~integrate~~nature of our ~~former~~California ~~operations~~education atcontracts. ~~Lathrop~~In ~~into~~2007, all of our revenue ~~remaining~~from ~~plants,~~the itCalifornia ~~could~~education ~~have~~market awas ~~material~~realized ~~adverse~~under the new, more competitive public bid contracting system.

23California public school enrollment has been essentially flat over the last three years and, while funds from recently enacted bond measures are available, spending for new schools has slowed from prior years. This leveling off of school enrollment has led to decreased demand for new school construction, causing a higher percentage of school bond funds to be utilized for modernization of existing structures and less on new permanent construction or facilities. Even the fast growing school districts are proceeding more conservatively in light of the slowdown in other districts. The modernization work has benefited the leasing companies, but has not resulted in relocatable classroom sales for Modtech because the leasing companies have not had to purchase significant numbers of new classrooms.

~~Table~~The sales decrease in Florida in 2007 was due to project delays in the education market, primarily from two large customers, and an overall decrease in the education market. The sales decrease in the Florida education market is the result of recently ~~Contents~~declining school enrollment. For the school year just completed in June 2007, public school enrollment in Florida declined for the first time since 1982. More than half of the school districts reported a decline and many school districts are now considering school closures.

The ~~effect~~ sales decrease onin ~~our~~Arizona ~~overall~~in ~~operations.~~2007 ~~Additionally,~~is ifdue ~~we are unable~~ to ~~sublease~~ the ~~Lathrop~~decreased ~~facility~~volume ~~for~~of atorders ~~least~~in the ~~rent that we remain obligated to pay~~ ~~through~~ education ~~December~~markets ~~31,~~for ~~2019,~~Arizona itand ~~will have an adverse effect on our cash flow~~Nevada.

•The sales decrease ~~Low~~in ~~Barriers~~Texas in 2007 is due to closing our Texas manufacturing facility in the ~~Commercial~~first ~~Buildings~~quarter ~~Market~~of 2007.

~~Although the requirement of having state approved plans creates a barrier to entry in California in the modular school building market, no such barrier exists in the~~Gross ~~commercial~~ (Loss) and light industrial modular building industry. The barriers in that market are relatively low, consisting primarily of capital required to develop manufacturing facilities and the availability of a qualified labor pool. Manufacturers of other modular buildings, including housing and classrooms, who possess a skilled work force and manufacturing facilities, could easily adapt their manufacturing facilities to produce modular structures. We expect continued competition from existing competitors as well as competition from new entrants into the modular building market. Profit

•Gross loss ~~Remediation~~for the year ended December 31, 2007 was $5.9 million, a decrease of ~~Material~~$10.3 million ~~Weakness~~from the gross profit of $4.4 million recorded the previous year. Gross loss as a percentage of net sales decreased to 6.8% in ~~Internal~~2007 ~~Controls~~down from a gross margin of 2.8% in 2006. Our gross profit margin declined as revenues declined because we were not able to adequately cover our fixed manufacturing costs, particularly due to continued production delays in key education projects and decreased sales volume in the education markets in California, Florida and Arizona. During 2007 we experienced negative gross margins on newly introduced product offerings including residential products. In the fourth quarter of 2007 we settled certain insurance claims and adjusted our estimate of proceeds from insurance claims, which resulted in a $1.6 million write down included in cost of goods sold. These insurance claims were for various building structural repairs, the costs of which were originally included in cost of goods sold.

Our Management’s Report on Internal Controls over Financial Reporting set forth in Item 9A below in accordance with Section 404 of the Sarbanes-Oxley Act has identified certain material weaknesses in our internal controls. We are in the process of remediating the material weaknesses. We do not expect to complete our remediation before September 2005. If we fail to complete our remediation or if we complete the remediation but fail to maintain the adequacy of our internal controlsSelling, ~~as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have~~ ~~effective~~ General ~~internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve~~ and ~~maintain~~Administrative an effective internal control environment could prevent us from reporting our financial results in a timely and accurate basis or cause investors to lose confidence in our reported financial information. Expense

•In 2007, selling, ~~High~~general ~~Costs~~and ofadministrative ~~Compliance~~(SG&A) expenses decreased $1.9 million from the prior year to $15.4 million with ~~Section~~SG&A ~~404~~costs representing 17.6% of net sales compared to 11.1% of net sales in the ~~Sarbanes-Oxley~~prior ~~Act~~year. The decrease in SG&A was primarily attributable to a $1.9 million decrease in the provision to the allowance for contract adjustments over the same period. Excluding the provision to the allowance for contract adjustments, SG&A costs were essentially flat from 2006 to 2007.

Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. Our compliance efforts have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Direct costs relating to 2004 Sarbanes-Oxley compliance were approximately $500,000. 22

In addition to the foregoing, other risks and uncertainties that may affect our future operations are described in our other filings with the Securities and Exchange Commission, including, without limitation, our reports on Form 10-Q. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations. Goodwill

~~ITEM~~During the 7Afourth quarter of 2006, our stock price declined significantly and in the first quarter of 2007 our market capitalization fell below the amount of our recorded equity. ~~QUANTITATIVE~~As ~~AND~~a ~~QUALITATIVE~~result ~~DISCLOSURES~~of ~~ABOUT~~the ~~MARKET~~existence ~~RISK~~of this and other indicators, we performed an impairment test to determine if the value of goodwill was recoverable under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” and it was determined that an impairment existed. As a result of this test, we recorded an estimated initial non-cash impairment charge of $33.6 million in the fourth quarter of 2006 to reduce our carrying value of goodwill to its implied fair value. The fair value estimate used in this initial goodwill impairment test was based on the trading price of our stock and the present value of future cash flows. This impairment charge represented management’s best estimate as to the actual charge at the time.

~~Market~~During the ~~risk~~three ~~refers~~months toended June 30, 2007, we completed the ~~risk~~final ~~that~~measurement aof goodwill ~~change~~impairment, resulting in a determination that the ~~level~~remaining balance of goodwill ~~one~~was orfully ~~more~~impaired. The fair value calculation was based on market approaches ~~factors~~and ~~such~~an asupdated ~~interest~~present ~~rates,~~value ~~foreign~~of ~~currency~~future ~~exchange~~cash ~~rates,~~flows. orAs ~~equity~~a ~~prices~~result ~~will~~of ~~result~~ this inindependent ~~losses~~goodwill ~~for~~impairment ameasurement, ~~certain~~we ~~financial~~recognized ~~instrument~~an orimpairment loss ~~group~~for the remaining balance of ~~instruments~~goodwill of $38.3 Wemillion dofor ~~not~~the ~~hold~~three-month period ~~any~~ended ~~financial~~June ~~instruments~~30, ~~that~~2007. ~~are~~As ~~subject~~a toresult ~~such~~of ~~risks,~~this ~~but~~full impairment recognition, we recognized ~~are~~an ~~exposed~~impairment loss of $38,303,000 to write-down the ~~risk~~carrying value of goodwill ~~increased~~to ~~interest~~zero ~~rates~~during onthe ~~our~~three-month ~~current~~period ~~credit~~ended ~~facility~~June 30, 2007 and the ~~risk~~ year ended ofDecember ~~loss~~31, ~~on credit extended to our customers~~2007.

~~INTEREST RATE RISK~~ Operating Loss

WeOperating losses ~~are~~increased ~~exposed~~ to ~~the~~$59.5 ~~risk~~million, ofor ~~fluctuation~~68.2% ~~in interest~~of ~~rates~~net onsales, ~~our~~for ~~credit~~the ~~facilities.~~year ~~During~~ended December ~~2004~~31, we2007 ~~did~~from ~~not~~$46.6 ~~use~~million ~~interest~~in ~~rate~~losses, ~~swaps~~ or ~~other types of derivative financial instruments~~29.9% ~~The carrying value~~ of ~~our~~net ~~prior~~sales, ~~credit~~for the year ~~facility~~ended at December 31, ~~2004~~2006. ~~approximates~~The ~~fair~~increase ~~value~~in asoperating ~~the~~losses ~~interest rate~~was isa ~~variable and resets frequently. Indebtedness under~~ result of the ~~replacement~~decline ~~credit facility we obtained~~ in ~~2005~~net ~~bears~~sales ~~interest~~and atgross ~~LIBOR~~margins ~~plus~~and ~~additional~~the ~~interest~~impairment ofloss ~~between~~on ~~7.5%~~goodwill, partially ~~and~~offset ~~8.50%.~~by ~~The~~the ~~additional~~decrease ~~interest~~in ~~charge~~SG&A isexpenses ~~based~~as ~~upon certain financial~~discussed ~~ratios~~ above. We

24Other Income (Expense)

~~Table~~Interest expense ofdecreased ~~Contents~~from $2.5 million in 2006 to $1.9 million in 2007. The decrease is attributable to significantly reduced debt during 2007 as compared to 2006 as well as lower interest rates over the same period.

In ~~estimate~~ 2006, we ~~that~~recognized a $3.4 million loss on extinguishment of debt. This consisted of a $2.1 million write off of the ~~average~~unamortized ~~amount~~debt issue costs of the Fortress Credit Corp. credit facility when it was replaced in the first quarter of 2006 with a credit facility from Bank of America N.A., a $0.3 million write off of the unamortized debt ~~outstanding~~issue ~~under~~cost of the Bank of America credit facility ~~for~~when the credit ~~2005~~facility ~~will~~was bereplaced in the fourth quarter of 2006 with loans from Laurus Master Fund, Ltd. (“Laurus”), $280.5 million in early termination fees paid to Bank of America during the fourth quarter of 2006 and amortization of a portion of the debt issue costs associated with the promissory notes issued to Laurus. ~~Therefore~~In addition we incurred a loss on the redemption of our $25.9 million convertible note issued to Amphora Limited (“Amphora Convertible Note”). On November 1, 2006 we redeemed the balance of the Amphora Convertible Note with a face value of $17.6 million through a combination of the conversion of one~~-percentage~~ ~~point~~million ~~increase~~shares inpursuant to the terms of the note and the payment of $8.0 ~~interest~~ million ~~rates~~cash. ~~would~~The ~~result~~shares inissued anupon ~~increase~~conversion inwere ~~interest~~recorded ~~expense~~at the $7.82 per share conversion price of the notes. The loss on extinguishment is calculated based on the $~~280,000~~15.2 ~~for~~million discounted amount of the ~~year~~Amphora Convertible Note and includes the write-off of $0.9 million in debt issuance costs and the non-cash benefit of writing off the $0.8 million embedded derivative.

~~CREDIT~~We recognized ~~RISK~~a non-cash gain of $7.7 million related to the change in fair value of warrant derivatives in 2007, compared to $7.0 million in 2006.

~~Our~~Amortization of ~~credit~~debt ~~terms~~costs ~~generally are “net 30”~~ for ~~dealer~~2007 ~~accounts~~was ~~and defined by contracts which vary for direct sales~~$0.6 ~~We actively monitor the risk of loss through a variety of control procedures involving senior management. Historically~~million, ~~credit~~compared ~~losses~~to ~~have been less than 0~~$1.5%4 ofmillion ~~sales and within our expectations~~for 2006.

~~ITEM~~Accretion of debt discount for 2007 was $2.8 million, compared to an accretion of $3.7 million ~~FINANCIAL~~for ~~STATEMENTS~~2006. ~~AND~~Accretion ~~SUPPLEMENTARY~~on ~~DATA~~debt discount for 2007 and 2006 included $0.5 million and $2.7 million, respectively, in incremental non-cash charges related to the conversion of convertible notes.

~~The~~We recognized ~~consolidated~~non-cash ~~financial~~early ~~statements~~debt conversion fees of $4.7 million in 2006. In the second ~~Company~~quarter of 2006, ~~along~~$1.9 ~~with~~million of the ~~notes~~non-cash ~~thereto~~early ~~and~~debt conversion fee was recognized for the ~~Report~~fair value of ~~Independent~~189,189 ~~Registered~~restricted ~~Public~~shares ~~Accounting~~issued ~~Firm~~to ~~report~~Amphora Limited ~~thereon~~as consideration for the early conversion of a portion of the Amphora Convertible Note. In the fourth quarter of 2006, $2.9 million of the non-cash ~~required~~ early debt conversion fee was recognized for the fair value of 636,663 incremental shares issued, or to be ~~filed~~issued, to Laurus as consideration for the early conversion of the convertible note issued in ~~response~~2006. toThe ~~this~~incremental ~~Item~~shares issued 8in ~~are~~the ~~attached~~fourth ~~hereto~~quarter asof ~~exhibits~~2006 ~~under~~were ~~Item~~the 15result of reducing the conversion price of the Laurus note during the quarter to $3.57 per share.

~~ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~23

~~On April 11, 2005, KPMG LLP (“KPMG”) advised us that it will not stand for reelection as our independent registered public~~Income ~~accounting~~ Tax firm following completion of its audit of our consolidated financial statements for the year ended December 31, 2004, and management’s assessment of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004. Benefit

~~The~~No benefit ~~audit~~for ~~reports~~income oftax ~~KPMG~~was onrecorded ~~our~~in ~~consolidated~~2007 ~~financial~~or ~~statements~~2006 asbecause ofunder ~~and~~applicable accounting standards our cumulative losses for the three years ended December 31, ~~2004~~2007 ~~and~~are ~~2003~~deemed ~~did~~to ~~not~~have ~~contain~~created ansignificant ~~adverse~~negative ~~opinion~~evidence orthat ~~disclaimer~~it ofis more ~~opinion,~~likely ~~and~~than ~~were~~ not ~~qualified~~that orwe ~~modified~~will asnot be able to ~~uncertainty, audit~~realize ~~scope~~our ornet ~~accounting~~deferred ~~principles~~tax assets. ~~The~~Therefore, ~~audit~~a ~~reports~~valuation ofallowance ~~KPMG~~has onbeen ~~management’s~~recorded ~~assessment~~against ofour ~~the~~net deferred ~~effectiveness~~tax ofassets, ~~internal~~which ~~control~~totals ~~over~~$28.0 ~~financial~~million ~~reporting~~at ~~and~~December ~~the~~31, ~~effectiveness~~2007, ofand ~~internal~~$19.2 million ~~control~~at ~~over financial reporting as of~~ December 31, ~~2004~~ ~~did~~2006. ~~not~~Our ~~contain~~2007 aneffective ~~adverse~~tax ~~opinion~~rate orwas ~~disclaimer~~15.5% ofbefore the deferred ~~opinion,~~tax ~~and~~asset ~~were~~valuation ~~not~~adjustment ~~qualified~~compared orto ~~modified~~prior asyear toat ~~uncertainty,~~13.0%. ~~audit~~The effective ~~scope~~tax orrate ~~accounting~~in ~~principles,~~2008 ~~except~~is ~~that~~expected ~~KPMG’s~~to ~~report~~range ~~indicates~~from ~~that~~35% weto ~~did~~39%. ~~not~~The ~~maintain~~ lower effective ~~internal control~~tax ~~over~~rates ~~financial~~in ~~reporting~~prior asyears ofis ~~December~~due ~~31,~~primarily ~~2004~~to ~~because of~~ the ~~effect~~goodwill ofimpairment charge ~~material weaknesses on the achievement~~ of ~~the~~$38.3 ~~objectives~~million ~~of the control criteria~~ and ~~contains~~$33.6 ~~explanatory~~million ~~paragraphs~~for asthe ~~described~~years inended ~~Item~~December ~~9A(d)~~31, ~~Report of Independent~~ ~~Registered~~ 2007 and ~~Public~~2006, ~~Accounting Firm~~respectively.

~~In connection with the audits of the two~~Year ~~fiscal~~ Ended ~~years ended~~ December 31, ~~2004,~~2006 ~~and~~Compared the subsequent interim period through April 11, 2005, there were: (1) no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to ~~their~~Year ~~satisfaction~~Ended ~~would~~December ~~have caused them to make reference in connection with their opinion to the subject matter of the disagreement~~31, ~~or (2) reportable events, except that KPMG reported on~~ ~~material weaknesses as described in Item 9A(d), Report of Independent Registered Public Accounting Firm.~~ 2005

On May 4, 2005, we engaged Peterson & Company (“Peterson”) as our independent registered public accountants for the interim periods after December 31, 2004 and the year ending December 31, 2005. TheNet decision to retain Peterson was approved by our Audit Committee. During our two most recent fiscal years and all subsequent interim periods, we did not consult with Peterson (i) regarding the application of accounting principles to a specific transaction, either completed or proposed, (ii) on any matter that was the subject of a disagreement or a reportable event as defined in Items 304(a)(1)(iv) and (v) of Regulation S-K, or (iii) the type of audit opinion that might be rendered on our financial statements, nor during such period did Peterson provide to us, either a written report or oral advice, that was an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issue. Sales

25Net sales for the year ended December 31, 2006, decreased to $156.0 million from $230.3 million for 2005, a decrease of $74.3 million or 32.3%. When compared to the prior year, in 2006 California sales of $89.1 million were down 30.2%; Florida sales of $36.2 million were down 32.6%; Arizona sales of $21.1 million were down 29.5% and Texas sales of $9.8 million were down 49.0%.

~~Table~~The decrease in Florida was due to a return to pre-2005 levels of ~~Contents~~sales in the region. Net sales in Florida in 2005 were bolstered by a major classroom project stemming from the hurricanes in the fall of 2004. The decrease in sales in 2006 in California was primarily due to project delays in the education market, lower production volumes in part due to factory inefficiencies and periodic labor shortages in California. In addition, in the prior year periods more of our California revenue was attributable to fieldwork on large school projects. In the current year period we were more reliant on revenue generated from the shipment of factory-built units for both schools and commercial customers.

~~ITEM~~It is believed 9Athat the demise of the piggyback contracting system in California has had an adverse affect on the sales volume in recent quarters. ~~CONTROLS~~Prior ~~AND~~to ~~PROCEDURES~~January 27, 2006 many school districts in California utilized “piggy-back” contracts which allowed them to order buildings off of contracts bid and entered into by builders, including Modtech, with other school districts. Since January 27, 2006, these piggyback contracts are no longer allowed. As a result, more public bids will have to occur for the same volume of work.

~~(a) Evaluation of Disclosure Controls and Procedures~~ Gross Profit

AsGross profit offor the ~~end~~year ofended ~~the~~December ~~period covered by this report~~31, we2006 ~~carried~~was ~~out~~$4.4 ~~an evaluation~~million, ~~under~~a ~~the~~decrease ~~supervision and with the participation~~ of ~~our management, including our Chief~~ ~~Executive~~ $4.6 million ~~Officer~~from ~~and~~the ~~our~~gross ~~Chief~~profit ~~Financial Officer,~~ of ~~the~~$8.9 million ~~effectiveness~~recorded of the ~~design~~previous ~~and~~year. Gross ~~operation~~profit ~~of our disclosure controls and procedures (~~as ~~such~~a ~~terms~~percentage ~~are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act~~ of ~~1934,~~net ~~as amended~~sales ~~(the~~decreased ~~“Exchange~~to ~~Act”)~~2.8% ~~Based~~in ~~upon~~2006 ~~that~~down ~~evaluation,~~from a gross ~~and~~margin ~~because~~ of ~~the~~3.9% ~~material~~in ~~weaknesses~~2005. ~~discussed~~Our ~~below,~~gross ~~our~~profit ~~Chief~~margin ~~Executive~~declined ~~Officer and Chief Financial Officer concluded that,~~ as ofrevenues declined ~~the~~more ~~end~~than ofexpected ~~such period, our disclosure controls~~ and ~~procedures~~we were not ~~effective~~able ~~in ensuring that the information required~~ to bereduce ~~filed~~fixed ~~or submitted under the Exchange Act is recorded, processed, summarized~~ and ~~reported within the time periods specified in the Securities and Exchange~~certain ~~Commission’s~~ variable ~~rules~~costs ~~and~~as ~~forms,~~quickly ~~and~~as ~~accumulated~~revenues ~~and~~declined. ~~communicated~~In ~~to our management~~addition, ~~including~~the ~~our~~prior ~~Chief~~year margins ~~Executive~~benefited ~~Officer~~from ~~and~~volume ~~Chief~~efficiencies ~~Financial~~related ~~Officer, as appropriate~~ to ~~allow timely decisions regarding required disclosure~~record results.

~~However~~Selling, ~~we believe that the accompanying consolidated financial statements fairly present~~ ~~the~~ General ~~financial condition~~ and ~~results~~Administrative ~~of operations for the fiscal years presented in this Annual Report on Form 10-K.~~ Expense

In 2006, selling, general and administrative expenses increased $1.4 million over the prior year to $17.3 million with SG&A costs representing 11.1% of net sales compared to 6.9% of net sales in the prior year. The increase in SG&A was primarily attributable to a $3.2 million provision to the allowance for contract adjustments and $1.2 million in stock compensation expense as a result of the implementation of SFAS123(bR). ~~Management’s~~Stock ~~Annual~~compensation ~~Report~~expense was reported in the past on ~~Internal~~a ~~Control~~pro ~~over~~forma ~~Financial~~basis ~~Reporting~~pursuant to the predecessor to SFAS 123(R), SFAS 123. Excluding the provision to the allowance for contract adjustments and stock compensation expense, SG&A costs declined $2.3 million from 2005 to 2006 due to reduced legal, accounting and professional services as well as reduced sales commissions that resulted from lower sales. In the third quarter of 2006 management took actions to reduce SG&A costs, primarily by a reduction of staffing.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15(d)-15(f) promulgated under the Securities Exchange Act 1934. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: 24

~~• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;~~Goodwill

•During the ~~provide~~fourth ~~reasonable~~quarter ~~assurance~~of ~~that~~2006, ~~transactions~~our ~~are~~stock price declined significantly and in the first quarter of 2007 our market capitalization fell below the amount of our recorded asequity. ~~necessary~~As a result of the existence of this and other indicators, we performed an impairment test to ~~permit~~determine ~~preparation~~if the value of ~~financial~~goodwill ~~statements~~was recoverable inunder ~~accordance~~the ~~with~~provisions ~~generally~~of ~~accepted~~SFAS ~~accounting~~No. ~~principles~~142, “Goodwill and ~~that~~Other ~~receipts~~Intangible Assets” and ~~expenditures~~it ~~are~~was ~~being~~determined ~~made~~that ~~only~~an impairment existed. As a result of this test, we recorded an estimated initial non-cash impairment charge of $33.6 million in ~~accordance~~the ~~with~~fourth ~~authorizations~~quarter of 2006 to reduce our ~~management~~carrying value of goodwill to its implied fair value. The fair value estimate used in this initial goodwill impairment test was based on the trading price of our stock and ~~directors;~~the present value of future cash flows. This impairment charge represented management’s best estimate as to the actual charge at the time.

•Operating Income ~~provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.~~(Loss)

~~Because~~Operating losses ofincreased ~~its~~to ~~inherent~~$46.6 ~~limitations~~million, ~~internal~~ ~~control~~or ~~over~~29.9% ~~financial~~of ~~reporting~~net ~~may~~sales, ~~not~~for ~~prevent~~the oryear ~~detect~~ended December ~~misstatements~~31, 2006 from $7.0 ~~Also,~~million ~~projection~~in oflosses, ~~any~~or ~~evaluation~~3.0% of ~~effectiveness~~net tosales, ~~future~~for ~~periods~~the year isended ~~subject~~December to31, ~~the~~2005. ~~risk~~The ~~that~~increase ~~controls~~in ~~may~~operating ~~become~~losses ~~inadequate~~was ~~because~~a result of the ~~changes~~decline in ~~conditions,~~net ~~or that~~sales ~~the~~and ~~degree~~gross ofmargins, ~~compliance~~the ~~with~~impairment loss on goodwill and the ~~policies~~increase orin ~~procedures~~SG&A ~~may~~expenses ~~deteriorate.~~as discussed above.

AOther Income ~~material weakness is a control deficiency~~ (~~as defined in PCAOB Auditing Standard No. 2~~Expense), or combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

~~Management~~Interest ~~assessed~~ expense ~~the~~decreased ~~effectiveness~~from of$6.9 ~~our~~million ~~internal~~in ~~control~~2005 ~~over~~to ~~financial~~$2.5 ~~reporting~~million asin ~~of December 31, 2004~~2006. The decrease ~~assessment~~is ~~identified~~attributable ~~the~~to ~~following~~significantly ~~material~~reduced ~~weaknesses~~debt induring ~~our~~2006 ~~internal~~as ~~control~~compared to ~~over financial reporting:~~ 2005.

•We recognized Asa of$3.4 ~~December~~million ~~31,~~loss ~~2004,~~on weextinguishment ~~lacked~~of ~~the~~debt. ~~necessary~~This ~~depth~~consisted of a $2.1 ~~personnel~~million ~~with~~write ~~sufficient~~off ~~technical~~of ~~accounting~~the ~~expertise~~unamortized todebt ~~ensure~~issue ~~preparation~~costs of ~~interim~~the ~~and~~Fortress Credit ~~annual~~Corp. ~~financial~~credit ~~statements~~facility ~~without~~when ~~material~~it ~~misstatements.~~was Asreplaced in the first quarter of 2006 with a ~~result,~~credit ~~(1)~~facility from Bank of America N.A., a ~~journal~~$0.3 ~~entry~~million ~~coding~~write ~~error~~off of the ~~was~~unamortized ~~identified~~debt ~~relating~~issue tocost of the ~~accounting~~Bank ~~for~~of aAmerica ~~legal~~credit ~~matter;~~facility ~~(2)~~when the credit anfacility ~~error~~was replaced in the ~~income~~fourth ~~tax~~quarter ~~provision~~of ~~calculation~~2006 ~~utilized~~with loans from Laurus, $0.5 million in early termination fees paid to ~~record~~Bank ~~income~~of ~~tax~~America ~~related~~during the ~~assets~~fourth ~~and~~quarter ~~liabilities~~of 2006 and ~~assessing~~amortization of a portion of the ~~recoverability~~debt issue costs associated with the promissory notes issued to Laurus. In addition we incurred a loss on the redemption of ~~deferred~~our ~~tax~~$25.9 ~~assets~~million ~~were~~convertible ~~identified;~~note issued to Amphora Limited (3“Amphora Convertible Note”). On November 1, 2006 we redeemed the balance of the Amphora Convertible Note with a ~~control~~face ~~failure~~value ~~occurred~~of ~~involving~~$17.6 ~~various~~million through ~~levels~~a combination of ~~review~~the conversion of one million shares pursuant to the terms of the note and ~~approval~~the ~~over~~payment ~~significant~~of ~~accrual~~$8.0 ~~estimates~~million cash. The shares issued upon conversion were recorded at the $7.82 per share conversion price of the notes. The loss on extinguishment is calculated based on the $15.2 million discounted amount of the Amphora Convertible Note and ~~open~~includes ~~invoices,~~the ~~resulting~~write-off inof ~~misstatements~~$0.9 million toin ~~accounts~~debt ~~payable,~~issuance ~~accrued~~costs ~~expenses,~~and ~~revenues,~~the ~~cost~~non-cash benefit of ~~sales~~writing off the $0.8 million embedded derivative.

26We recognized a non-cash gain of $7.0 million related to the embedded and warrant derivatives associated with the Amphora Convertible Note and outstanding warrants in 2006.

~~Table~~ Amortization of ~~Contents~~debt costs for 2006 was $1.4 million.

~~and operating expenses; and (4) a number~~ Accretion of ~~account~~convertible ~~reconciliation~~debt ~~controls~~discount ~~and~~for ~~management~~2006 ~~review~~was ~~and~~$3.7 ~~approval controls in our financial reporting process were not operating effectively~~million, ~~including~~which ~~inadequate~~included ~~management~~$2.7 million ~~review~~incremental ofnon-cash ~~transactions~~charges inrelated ~~the procurement and disbursement processes~~ to ~~ensure~~ the ~~accuracy~~discount ~~and~~on ~~completeness of recorded transactions, resulting in incomplete documentation supporting~~ the ~~authorization of purchases and disbursements~~$19.7 million ~~This~~conversion ~~material weakness represented more than a remote likelihood that a material misstatement~~ of ~~our~~convertible ~~annual~~notes orin ~~interim financial statements would not have been prevented or detected~~2006.

•We recognized ~~Our~~non-cash ~~procedures~~early ~~associated~~debt ~~with~~conversion ~~accounting~~fees ~~for~~of ~~our~~$4.7 ~~long-term~~million ~~revenue~~in ~~contracts~~2006. ~~were~~In the second ~~not~~quarter ~~sufficient~~of to2006, ~~ensure~~$1.9 ~~that~~million ~~revenue~~of ~~and~~the ~~costs~~non-cash ~~were~~early ~~properly~~debt ~~reflected~~conversion fee was inrecognized ~~our~~for ~~consolidated~~the ~~financial~~fair ~~statements.~~value ~~Specifically~~of 189,189 ~~the~~restricted ~~estimated~~shares ~~costs~~issued to ~~complete~~Amphora Limited ~~individual~~as ~~contracts~~consideration ~~were~~for ~~not~~the ~~reviewed~~early ~~for~~conversion ~~propriety~~of ~~and~~a ~~approved~~portion byof ~~senior~~the ~~project~~Amphora Convertible ~~management~~Note. ~~and~~In ~~cost~~the ~~overruns~~fourth ~~known~~quarter ~~prior~~of to2006, ~~the~~$2.9 ~~issuance~~million of the ~~consolidated~~non-cash early ~~financial~~debt ~~statements~~conversion ~~were~~fee ~~not~~was ~~recorded~~recognized infor the ~~correct~~fair ~~accounting~~value ~~period.~~of ~~This~~636,663 incremental ~~material~~shares ~~weakness~~issued, ~~resulted~~or into ~~material~~be ~~misstatements~~issued, to ~~amounts~~Laurus ~~recorded~~as consideration for the early ~~revenue~~conversion ~~and~~of ~~cost~~the ofconvertible ~~sales~~note issued in 2006. The ~~identified~~incremental ~~misstatements~~shares issued in the fourth quarter of 2006 were ~~corrected~~the ~~prior~~result toof reducing the ~~issuance~~conversion price of ~~our~~the ~~2004~~Laurus ~~consolidated~~note ~~financial~~during ~~statements~~the quarter to $3.57 per share.

•Income Tax As of December 31, 2004, our inventory valuation process did not include appropriate controls over inventory costs. Specifically, there was no control designed to ensure that appropriate raw material costs, which impact our inventory and cost of sales accounts, were input accurately into the system. This material weakness resulted in material misstatements to amounts recorded for inventory and cost of sales. The identified misstatements were corrected prior to the issuance of our 2004 consolidated financial statements.Benefit

•No benefit Wefor ~~did~~income ~~not~~tax ~~have~~was ~~adequate~~recorded ~~access~~in ~~and~~2005 ~~segregation~~or of2006. ~~duty~~No ~~controls~~tax ~~within~~benefit ~~the~~was recognized ~~accounts~~because ~~payable~~under ~~and~~applicable ~~payroll~~accounting ~~applications.~~standards ~~Specifically~~our cumulative losses for the three years ended December 31, ~~certain~~2006 ~~individuals~~are ~~who~~deemed ~~had~~to ~~access~~have ~~and~~created significant ~~the~~negative ~~ability~~evidence that it is more likely than not that we will not be able to ~~initiate~~realize ~~and~~our ~~record~~net ~~transactions~~deferred ~~were~~tax ~~also~~assets. ~~those~~Therefore, ~~individuals~~a ~~who~~valuation ~~performed~~allowance has ~~key~~been ~~reconciliation~~recorded against our net deferred tax assets, which totals $19.2 million at December 31, 2006, and ~~financial~~$12.3 ~~reporting~~million ~~functions~~at December 31, 2005. ~~These~~Our ~~material~~2006 effective ~~weaknesses~~tax ~~represented~~rate ~~more~~was ~~than~~13.0% abefore ~~remote~~the ~~likelihood~~deferred ~~that~~tax aasset ~~material~~valuation ~~misstatement~~adjustment compared ~~related~~to prior year at 23.7%. The lower effective tax rate in 2006 is due primarily to the ~~accuracy~~goodwill ~~and~~impairment ~~completeness~~charge of ~~these~~$33.6 ~~account~~million. ~~balances~~The lower effective tax rate in ~~our~~2005 ~~annual~~is ordue ~~interim~~primarily ~~financial~~to ~~statements~~the ~~would~~$5.8 ~~not~~million ~~have~~in ~~been~~non-cash losses ~~prevented~~for orthe ~~detected~~embedded and warrant derivatives, which are not deductible for tax purposes.

• As of December 31, 2004, we did not have adequate controls over spreadsheets used in our financial reporting process. These spreadsheets included (1) a spreadsheet used to support and monitor the preparation of significant journal entries relating to revenue and cost of sales, costs and estimated earnings in excess of billings on contracts, and billings in excess of costs and estimated earnings on contracts recorded in our consolidated financial statements; and (2) a spreadsheet utilized in calculating earnings per share, including the weighted average shares outstanding and the weighted average options outstanding utilized in determining diluted earnings per share. We determined that there were no change management or access controls in place to prevent an unauthorized modification of the formulas within these spreadsheets and no management review or approval to detect unauthorized changes or errors. Therefore, undetected errors could have resulted in incorrect journal entries being posted to these accounts and errors in our calculation of earnings per share. These material weaknesses represented more than a remote likelihood that a material misstatement related to revenue, cost of sales, costs and estimated earnings in excess of billings on contracts, billings in excess of costs and estimated earnings on contracts and our earnings per share in our annual or interim financial statements would not have been prevented or detected.25

~~• The following information technology general control deficiencies in the aggregate were deemed to represent a material weakness in our control environment~~ Liquidity and ~~were~~Capital the result of a lack of communication and enforcement of control consciousness. These deficiencies in the aggregate represented more than a remote likelihood that a material misstatement of our annual or interim financial statements would not have been prevented or detected.Resources

•In recent years ~~Deficiencies~~we ~~related~~have tofunded ~~logical~~our operations and ~~physical~~capital ~~access~~expenditures ~~requests,~~mostly ~~password~~with ~~parameters,~~cash generated ~~security~~internally ~~violation~~by ~~monitoring~~operations, ~~removal~~borrowings ofunder ~~access~~various ~~rights~~credit ~~for terminated employees~~facilities, cash ~~segregation~~received offrom ~~duties~~exercised ~~reviews,~~options ~~employee acknowledgement of security policies, privileged access rights~~ and ~~powerful~~private ~~user~~placements ~~IDs, role based security profiles, and periodic reviews~~ of ~~user access profiles~~ equity.

27Cash and cash equivalents were $0.4 million at December 31, 2007 compared to $6.3 million at December 31, 2006. The decrease was primarily due to the loss from operations, excluding the non-cash impairment loss on goodwill and non-cash stock compensation expense, and payments on our accounts payable, offset by cash provided by reductions in restricted cash and collections of accounts receivable. We believe that our existing cash and cash equivalents, anticipated cash flows from operations in 2008, and the proceeds of an equity financing in the first quarter of 2008, will be sufficient to fund our operations and anticipated capital expenditures for at least the next 12 months.

~~Table~~Cash totaling $6.2 million was used by operating activities during 2007 compared to cash used of ~~Contents~~$7.5 million during 2006. During 2007, the net loss, adjusted for non-cash expenses from depreciation and amortization, provision for contract adjustments, gain on sale of equipment, stock compensation expense, impairment loss on goodwill, gain on derivative liability and accretion on debt discount used $18.2 million of operating cash. Changes in remaining working capital balances during this period provided $12.0 million in cash.

•Net cash used ~~Deficiencies~~by ~~related~~investing toactivities ~~configuration~~was ~~changes,~~$0.4 ~~authorization~~million ~~for~~in ~~changes~~2007, ~~approval~~compared to net cash provided by investing activities of ~~testing,~~$3.0 million ~~testing~~in 2006. Capital expenditures were $1.0 million in 2007 compared to $1.4 million in 2006. Prior year cash from investing activities included the $4.4 million proceeds from the sale of ~~changes~~our ~~prior~~manufacturing plant in Florida to ~~being~~NL ~~placed~~Ventures ~~into~~V, ~~production~~L.P. Concurrently with the sale of the property, ~~monitoring~~we ~~for~~entered ~~unauthorized~~into ~~program~~a ~~changes~~lease ~~and~~agreement ~~configuration~~with ~~changes~~the purchaser’s assignee, ~~communication~~NL ofVentures ~~changes~~V Plant City, ~~updates~~L.P., pursuant to which we leased back the property for an initial term of ~~control~~20 ~~documentation,~~years. ~~developer~~We ~~access~~have the option to extend ~~production~~the lease term for two additional terms of five years each. The annual rent is $491,160 for the first year of the lease and ~~emergency~~increases ~~changes~~at the rate of 3% per annum thereafter. We have posted a security deposit of $0.5 million in connection with the lease.

•Net cash provided ~~Deficiencies~~by ~~related~~financing toactivities ~~updates~~was of$0.8 ~~control~~million ~~documentation~~in 2007, ~~data~~consisting ~~migration,~~of proceeds ~~training~~from onthe ~~new~~reduction ~~applications,~~of ~~post-implementation~~restricted ~~review~~cash of $4.5 million, ~~and~~offset ~~testing~~by ~~approach~~$3.7 million in principal payments on long-term debt.

•As of December ~~Deficiencies~~31, ~~related~~2007, towe ~~backup~~were ~~tape~~not ~~off-site~~in ~~storage,~~compliance ~~backup~~with ~~tape~~all ~~on-site~~covenants ~~storage,~~with ~~monitoring~~our oflender Laurus ~~backups~~Master Fund, ~~problem~~Ltd. ~~management,~~(“Laurus”) ~~periodic~~and ~~restoration~~two of ~~backups,~~its ~~backup~~related ~~tape~~entities. ~~rotation~~In ~~policy~~March 2008, ~~backup~~we ~~tape~~entered ~~log,~~into ~~completion~~an agreement with Laurus and its two related entities pursuant to which we obtained a waiver of ~~job~~the ~~schedules,~~event ~~documentation~~of default and restructured certain other provisions of ~~operating~~the ~~procedures~~promissory notes issued to Laurus in 2006, as further described below and ~~operations~~in ~~reporting~~Note 21.

•Management has ~~Our~~taken ~~program for monitoring~~ the ~~effectiveness~~following ~~of internal control over financial reporting~~actions, ~~including~~among ~~information~~others ~~technology related controls, was not sufficient~~ to ~~provide~~address usliquidity ~~with~~and ~~a basis to monitor the quality of our internal control~~ operating performance over time. Internal control monitoring involves assessing the design and operation of internal control on a timely basis and taking necessary corrective actions. This material weakness represented more than a remote likelihood that a material misstatement of our annual or interim financial statements would not have been prevented or detected.issues:

In· As discussed ~~making~~above, ~~this~~in ~~assessment,~~March ~~management~~2008 ~~used~~we ~~the~~entered ~~criteria~~into ~~set~~an ~~forth~~amendment byand waiver agreement with Laurus and its related entities. Pursuant to the ~~Committee~~waiver, we issued warrants to purchase 3,000,000 shares of ~~Sponsoring~~Modtech’s ~~Organizations~~common stock at an exercise price of $0.40 per share and additional promissory notes in the ~~Treadway~~aggregate ~~Commission~~principal ~~(COSO)~~ amount inof ~~Internal~~$750,000, ~~Control-Integrated~~on ~~Framework~~which the principal amount plus related interest are due and payable on December 29, 2009. ~~Because~~In return Laurus and its related entities agreed to defer principal payments of $375,000 per month for the ~~material~~period ~~weaknesses~~March 1, 2008 ~~described~~through ~~above~~June 30, ~~management~~2008, ~~concludes~~for ~~that~~a total deferral of $1.5 million, temporarily eliminate the covenant to maintain on a monthly basis at least $9 million in cash and eligible accounts receivable (the “Minimum Balance”) as of December , 31, ~~2004~~2007 through February 29, ~~our~~2008, ~~internal~~reduce ~~control~~the ~~over~~Minimum ~~financial~~Balance ~~reporting~~from ~~was~~$9 ~~not~~million to ~~effective~~$5.4 million for the period March 1, 2008 through March 31, 2008 and to $6.6 million for the period April 1, 2008 through June 30, 2008. The monthly interest payments of approximately $110,000 per month will continue without deferral or abatement and, commencing July 1, 2008, the monthly principal payments will resume and the Minimum Balance will again be $9 million.

~~Our~~· On March 10, ~~independent~~2008, ~~registered~~we ~~public~~completed ~~accountants~~an ~~have~~equity ~~issued~~financing anwith ~~attestation~~existing ~~report~~stockholders, new investors onand current directors and executives of the company, pursuant ~~management’s~~ to ~~assessment~~which we issued 14,190 shares of ~~our~~its ~~internal~~newly ~~controls~~created ~~over~~Series ~~financial~~B ~~reporting.~~Preferred ~~This~~Stock ~~report~~and 2,256 shares ~~appears~~of ~~below~~its newly created Series C Preferred Stock, each at $100 per share for an aggregate purchase price of $1.6 million.

~~(c)~~· We closed our ~~Changes~~Glen inRose, ~~Internal~~Texas ~~Control~~manufacturing ~~over~~facility, ~~Financial~~and ~~Reporting~~significantly reduced production staffing, overhead and selling general and administrative expenses.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal controls performed during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26

In· We have developed ~~order~~an operating plan to ~~address~~manage ~~the~~costs ~~material~~in ~~weaknesses~~line ~~described~~with ~~above~~estimated total revenues for fiscal 2008, ~~management~~including ~~has~~contingencies ~~taken~~for ~~the~~further ~~following~~cost ~~actions~~reductions if projected ~~subsequent~~revenue toand ~~December~~improvement ~~31,~~in ~~2004:~~operating results are not fully realized.

•· We have identified Aadditional ~~Manager~~financing alternatives, including public or private offerings of ~~Internal~~equity ~~Control~~or ~~has~~debt ~~been~~securities ~~hired~~that we plan to pursue if necessary during 2008.

•Based on the ~~Payroll~~actions ~~functions~~taken ~~have~~to ~~been~~date, ~~divided~~and ~~between~~based ~~the~~on ~~Human~~our ~~Resources~~current ~~Department~~backlog and ~~the~~projections of future ~~Payroll~~contracts, ~~Manager.~~management ~~Additional~~believes ~~documented~~that ~~management~~existing ~~review~~cash resources, working capital and ~~approval~~cash ~~controls~~flow ~~have~~from ~~been~~operations ~~added~~will ~~before~~be ~~payroll~~sufficient ~~checks~~to ~~can~~meet our operating and liquidity requirements and that compliance with provisions of the modified promissory note agreements will be ~~generated~~maintained during 2008.

• All project budgets and change orders must now be approved by the Senior Project Management and the Chief Financial Officer must now review and approve all job reports before journal entries are made.Contractual Obligations

•The following Atable ~~more~~represents ~~formalized~~a ~~approach~~list ~~to management review and approval~~ of ~~income~~our ~~tax~~future ~~work~~contractual ~~performed~~obligations byand commitments ~~third~~as ~~party~~of ~~service~~December ~~providers~~31, ~~is now being developed.~~2007:

• Implementation of a computerized perpetual inventory system has begun. Management estimates that the system will be fully operational by September 30, 2005. Prior to completion of the system, all inventory items ordered without an item key will require management approval.

Payments Due By Year Ending December 31,	Debt		Operating Leases		Total
2008		3,000,000		1,290,000		4,290,000
2009		11,354,000		1,300,000		12,654,000
2010		-		1,303,000		1,303,000
2011		-		1,313,000		1,313,000
2012		-		1,227,000		1,227,000
Thereafter		-		12,020,000		12,020,000

	$	14,354,000	$	18,453,000	$	32,807,000

•Other than Anthe ~~experienced~~deferred ~~Certified~~gain ~~Public~~on ~~Accountant~~our ~~has~~sales ~~been~~leaseback ~~hired~~transaction ~~as Director~~ of ~~Accounting~~$1.4 Amillion included ~~program~~in ~~has~~other ~~been~~long-term ~~adopted~~liabilities, towe ~~identify~~do ~~key~~not ~~account~~have ~~reconciliations,~~any ~~procedures~~capital lease obligations or purchase obligations, ~~and~~nor todo ~~reports~~we ~~and~~have ~~assign~~any ~~various~~other ~~levels~~form of ~~review~~long-term liabilities, ~~and~~reflected ~~approval.~~on ~~Review~~our ofconsolidated ~~the~~balance ~~general~~sheet ~~ledger~~under ~~will~~GAAP ~~now~~that ~~also~~are not set ~~include~~forth in the ~~Reporting~~preceding table.

28Related Party Transactions

~~Table~~Except as disclosed ofabove ~~Contents~~under Item 1. Business - Backlog, for the years ended December 31, 2007 and 2006, we had no related party transactions.

~~Manager and Director~~ Use of ~~Accounting.~~Estimates ~~Management review of the accrual process will be formalized~~ and aCritical ~~search~~Accounting for unrecorded liabilities will be performed each month. Access rights to our computing tools have been changed so that now only the Chief Financial Officer has the ability to alter formulas within our spreadsheet programs.Policies

•In the preparation Weof our consolidated financial statements, we are ~~attempting~~required to ~~hire~~make estimates ~~additional~~and ~~professional~~assumptions ~~information~~that ~~technology~~affect ~~staff~~the toamount ~~assist~~of inassets, ~~segregating~~liabilities, ~~duties~~revenue and ~~among~~expense ~~various~~reported ~~individuals~~in the statements. AnWe ~~independent~~base ~~consultant~~our ~~will~~estimates and assumptions on historical experience and other factors believed to be ~~used~~reasonable inunder the circumstances ~~second~~and ~~quarter~~continually ofevaluate ~~2005~~our toestimates ~~reprogram~~and assumptions, nevertheless, estimates are inherently uncertain and actual results could significantly differ from our ~~spreadsheets~~estimates. We believe that the following discussion addresses our most significant accounting policies.

~~Our~~Allowances ~~management~~ for ~~believes~~Contract that the above remediation measures as outlined, will address the material weaknesses described above. The Audit Committee and management will continue to monitor the effectiveness of our internal controls and procedures on an ongoing basis and will take further action as appropriate. Adjustments

~~(d)~~We maintain ~~Report~~allowances for contract adjustments that result from the inability of ~~Independent~~ our ~~Registered~~customers ~~Public~~to ~~Accounting~~make ~~Firm~~their required payments. Management bases its allowances on analysis of the aging of accounts receivable, by account, at the date of the financial statements, assessments of historical collection trends, and an evaluation of the impact of current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

~~The~~Accrual for ~~Board~~Worker’s ofCompensation ~~Directors and Shareholders~~ Reserve

~~Modtech~~Prior to July ~~Holdings~~31, ~~Inc~~2006, we were self-insured for workers compensation under a high deductible program.: Management bases its accrual estimate on input from the insurance carrier which includes information regarding open and closed cases, historical costs associated with those claims, certain developed costs and an estimate of Incurred But Not Reported (IBNR) claims. Variation from the estimates of future liability claims from the pre-July 31, 2006 claims is not only possible, but probable. The inherent variability may result in actual costs being either above or below the estimates recorded on our consolidated financial statements.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A (b)), that Modtech Holdings, Inc. (the Company) did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of material weaknesses identified in management’s assessment, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. 27

~~We conducted our audit in~~Revenue ~~accordance~~ Recognition ~~with~~on ~~the~~Construction standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Contracts

AContracts are ~~company’s~~recognized ~~internal~~using ~~control over financial reporting is a process designed to provide reasonable assurance regarding~~ the ~~reliability~~ percentage-of-completion ~~financial~~method ~~reporting and the preparation~~ of ~~financial statements for external purposes in accordance with generally accepted~~ accounting ~~principles. A company’s internal control over financial reporting includes those policies~~ and ~~procedures~~, ~~that~~ therefore, ~~(1)~~take ~~pertain~~into toaccount the ~~maintenance of records that~~costs, inestimated ~~reasonable~~earnings ~~detail,~~and ~~accurately~~revenue ~~and~~to ~~fairly~~date on ~~reflect~~contracts ~~the~~not ~~transactions~~yet ~~and~~completed. ~~dispositions~~Revenue ofrecognized ~~the~~is ~~assets~~that percentage of the total ~~company;~~contract ~~(2)~~price ~~provide reasonable assurance~~ that ~~transactions~~cost ~~are~~expended ~~recorded~~to asdate ~~necessary~~bears to ~~permit~~ ~~preparation~~anticipated offinal total cost, ~~financial~~based ~~statements~~on incurrent ~~accordance~~estimates ~~with~~of ~~generally~~costs ~~accepted~~to ~~accounting~~complete. ~~principles,~~The percentage-of-completion ~~and~~methodology ~~that~~generally ~~receipts~~results ~~and~~in ~~expenditures of~~ the ~~company~~recognition ~~are~~of reasonably ~~being~~consistent ~~made~~profit ~~only~~margins inover ~~accordance~~the ~~with~~life ~~authorizations~~ of ~~management~~a ~~and~~contract. ~~directors of the~~Cumulative ~~company;~~ revenues ~~and~~recognized ~~(3)~~may ~~provide~~be ~~reasonable~~less ~~assurance~~or ~~regarding~~greater ~~prevention~~than orcumulative ~~timely~~costs ~~detection~~and ofprofits billed ~~unauthorized~~at ~~acquisition,~~any ~~use,~~point orin ~~disposition~~time ofduring ~~the~~a ~~company~~contract’s ~~assets~~term. ~~that~~The ~~could~~resulting ~~have~~difference is arecognized ~~material~~as ~~effect~~unbilled onor ~~the~~deferred ~~financial statements~~revenue.

~~Because~~Any estimation ofprocess, ~~its~~including ~~inherent~~that ~~limitations~~used in preparing contract accounting models, involves ~~internal~~inherent ~~control~~risk. ~~over~~We ~~financial~~attempt ~~reporting~~to ~~may~~reduce ~~not~~the inherent risk relating to ~~prevent~~ revenue orand ~~detect~~cost ~~misstatements.~~estimates ~~Also~~in percentage-of-completion models through corporate policy, ~~projections~~approval ofand ~~any~~monitoring ~~evaluation~~processes. ofRisks ~~effectiveness~~relating to ~~future~~project ~~periods~~delivery, productivity and other factors are ~~subject~~considered toin the ~~risk~~estimation ~~that~~process. ~~controls~~Our estimates ~~may~~of ~~become~~revenues ~~inadequate~~and ~~because~~costs on construction contracts change periodically in the normal course of business due to factors such as productivity and modifications of contractual arrangements. Such changes are reflected in ~~conditions,~~the results orof ~~that~~operations as a change in accounting estimate in the ~~degree~~period ofthe revisions ~~compliance~~are ~~with~~determined. Provisions for estimated losses are made in the ~~policies~~period or in ~~procedures~~which ~~may~~the ~~deteriorate.~~loss first becomes apparent.

~~A material weakness is a control deficiency, or~~Revenue ~~combination~~ Recognition offor ~~control~~Other ~~deficiencies,~~Product ~~that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented~~ Sales

29Sales of other products are recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the related accounts receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

~~Table~~ Valuation of ~~Contents~~the Embedded and Warrant Derivatives

The valuation of our embedded derivatives and warrant derivatives are determined primarily by the Black-Scholes option pricing model. An embedded derivative is a derivative instrument that is embedded within another contract, which under the convertible note (the host contract) includes the right to convert the note by the holder, certain default redemption right premiums and a change of control premium (payable in cash if a fundamental change occurs). In accordance with FASB Statement No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities, these embedded derivatives are marked-to-market each reporting period, with a corresponding non-cash gain or ~~detected~~loss charged to the current period. ~~The~~A ~~following~~warrant ~~material~~derivative ~~weaknesses~~liability ~~have~~is ~~been~~determined ~~identified~~in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and ~~included~~Potentially Settled in, ~~management~~a Company’s ~~assessment~~Own Stock” (“EITF 00-19”). Based on EITF 00-19, warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. The practical effect of ~~December~~this 31has been that when our stock price increases so does our derivative liability, ~~2004:~~resulting in a non-cash loss charge that reduces our earnings and earnings per share. When our stock price declines, we record a non-cash gain, increasing our earnings and earnings per share.

•To determine Asthe fair value of ~~December~~our ~~31,~~embedded ~~2004~~derivatives, ~~the~~management ~~Company~~evaluates assumptions ~~lacked~~regarding the ~~necessary~~probability ~~depth~~ of ~~personnel~~certain ~~with~~future ~~sufficient~~events. ~~technical~~Other ~~accounting~~factors used ~~expertise~~ to ~~ensure~~determine ~~preparation~~fair ofvalue ~~interim~~include ~~and~~our ~~annual~~period ~~financial~~end ~~statements~~stock ~~without~~price, ~~material~~historical stock ~~misstatements. As a result~~volatility, ~~(1)~~risk afree ~~journal~~interest ~~entry~~rate ~~coding~~and ~~error~~derivative ~~was~~term. ~~identified~~The ~~relating~~fair tovalue recorded ~~the accounting~~ for ~~a legal matter; (2) an error in~~ the ~~income~~derivative ~~tax~~liability ~~provision~~varies ~~calculation~~from ~~utilized~~period to ~~record~~period. ~~income~~This variability ~~tax~~may ~~related~~result ~~assets~~in ~~and liabilities and assessing~~ the ~~recoverability~~actual ofderivative ~~deferred~~liability ~~tax~~for ~~assets were identified; (3)~~ a ~~control~~period ~~failure~~either above ~~occurred~~or ~~involving~~below ~~various~~the ~~levels~~estimates ofrecorded ~~review~~on ~~and~~our ~~approval~~consolidated ~~over~~financial ~~significant accrual estimates and open invoices~~statements, resulting in ~~misstatements~~significant tofluctuations ~~accounts~~in ~~payable,~~other ~~accrued~~income ~~expenses, revenues, cost of sales and operating expenses; and~~ (4expense) abecause ~~number~~ of ~~account reconciliation controls and management review and approval controls in~~ the corresponding ~~Company’s~~non-cash ~~financial~~gain ~~reporting~~or ~~process~~loss ~~were not operating effectively, including inadequate management review of transactions in the procurement and disbursement processes to ensure the accuracy and completeness of~~ recorded ~~transactions, resulting in incomplete documentation supporting the authorization of purchases and disbursements~~. ~~This material weakness represented more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements would not have been prevented or detected.~~

•New Accounting The Company’s procedures associated with accounting for its long-term revenue contracts were not sufficient to ensure that revenue and costs were properly reflected in its consolidated financial statements. Specifically, the estimated costs to complete individual contracts were not reviewed for propriety and approved by senior project management and cost overruns known prior to the issuance of the consolidated financial statements were not recorded in the correct accounting period. This material weakness resulted in material misstatements to amounts recorded for revenue and cost of sales. The identified misstatements were corrected prior to the issuance of the Company’s 2004 consolidated financial statements.Standards

•In July 2006, Asthe ofFASB ~~December~~issued ~~31,~~Interpretation ~~2004~~No. 48, ~~the~~“Accounting ~~Company’s~~for ~~inventory~~Uncertainty ~~valuation~~in Income ~~process~~Taxes” ~~did~~(“FIN ~~not~~48”). ~~include~~FIN ~~appropriate~~48 ~~controls~~requires ~~over~~the ~~inventory~~use ~~costs.~~of ~~Specifically,~~a ~~there~~two-step ~~was~~approach nofor recognizing ~~control~~and ~~designed~~measuring totax ~~ensure~~benefits ~~that~~taken ~~appropriate~~or ~~raw~~expected ~~material~~to ~~costs,~~be ~~which~~taken ~~impact~~in ~~the~~a ~~Company’s~~tax return ~~inventory~~ and ~~cost~~disclosures ofregarding ~~sales~~uncertainties ~~accounts,~~in income tax positions. We were required ~~input~~to ~~accurately~~adopt ~~into~~FIN ~~the~~48 ~~system~~effective January 1, 2007. ~~This~~Only ~~material~~tax ~~weakness~~positions ~~resulted~~that meet the inmore ~~material~~likely ~~misstatements~~than tonot ~~amounts~~recognition ~~recorded~~threshold ~~for~~at ~~inventory~~the ~~and~~effective ~~cost~~date may be recognized upon adoption of ~~sales~~FIN 48. ~~The~~Implementation ~~identified~~of ~~misstatements~~this ~~were~~new ~~corrected~~standard ~~prior~~did not have toa ~~the~~significant ~~issuance~~impact ofon ~~the~~our ~~Company’s~~financial ~~2004~~position, ~~consolidated~~results ~~financial~~of ~~statements~~operation or cash flows.

•In September ~~The~~2006, ~~Company~~the ~~did~~FASB ~~not~~issued ~~have~~Statement ~~adequate access and segregation~~ of ~~duty~~Financial ~~controls~~Accounting ~~within~~Standards No. 157, ~~the~~“Fair ~~accounts~~Value ~~payable~~Measurements” ~~and~~(“SFAS ~~payroll applications~~157”). ~~Specifically,~~SFAS ~~certain~~157 ~~individuals~~does ~~who~~not ~~had~~require ~~access~~new ~~and~~fair value ~~the~~measurements ~~ability~~but torather ~~initiate~~defines ~~and~~fair ~~record~~value, ~~transactions~~establishes ~~were~~a ~~also~~framework ~~those~~for measuring ~~individuals~~fair ~~who~~value ~~performed~~and ~~key~~expands ~~reconciliation~~disclosure ~~and~~of ~~financial~~fair ~~reporting~~value ~~functions~~measurements. ~~These~~SFAS 157 is ~~material~~effective ~~weaknesses~~for ~~represented~~fiscal ~~more~~years ~~than~~beginning aafter ~~remote~~November ~~likelihood~~15, ~~that~~2007 aand ~~material~~interim periods ~~misstatement~~within ~~related~~those tofiscal ~~the~~years. ~~accuracy~~We ~~and~~are ~~completeness~~currently ofassessing ~~these account balances in~~ the ~~Company’s~~impact ~~annual~~of SFAS 157 oron ~~interim~~our consolidated financial ~~statements~~position ~~would~~and ~~not~~results ~~have~~of ~~been prevented or detected~~operations.

• As of December 31, 2004, the Company did not have adequate controls over spreadsheets used in the financial reporting process. These spreadsheets included (1) a spreadsheet used to support and monitor the preparation of significant journal entries relating to revenue and cost of sales, costs and estimated earnings in excess of billings on contracts, and billings in excess of costs and estimated earnings on contracts recorded in the consolidated financial statements; and (2) a spreadsheet utilized in calculating earnings per share, including the weighted average shares outstanding and the weighted average options outstanding utilized in determining diluted earnings per share. There were no change management or access controls in place to prevent an unauthorized modification of the formulas within these spreadsheets and no management review or approval to detect unauthorized changes or errors. Therefore, undetected errors could have resulted in incorrect journal entries being posted to these accounts and errors in the calculation of earnings per share. These material weaknesses represented more than a remote likelihood that a material misstatement related to revenue, cost of sales, costs and estimated earnings in excess of billings on contracts, billings in excess of costs and estimated earnings on contracts and earnings per share in the Company’s annual or interim financial statements would not have been prevented or detected.28

30In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115.” This statement permits companies to choose to measure many financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement of accounting for financial instruments. This statement applies to all entities, including not for profit. The fair value option established by this statement permits all entities to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We are currently assessing the impact adoption of SFAS No. 159 will have on our consolidated financial statements.

~~Table~~In December 2007, the FASB issued Statement of ~~Contents~~Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“FAS 141(R)”). FAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree, as well as the goodwill acquired. Significant changes from current practice resulting from FAS 141(R) include the expansion of the definitions of a “business” and a “business combination.” For all business combinations (whether partial, full or step acquisitions), the acquirer will record 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settlement; and acquisition-related transaction and restructuring costs will be expensed rather than treated as part of the cost of the acquisition. FAS 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the potential impact of this statement.

•In December ~~The~~2007, ~~following~~the ~~information~~FASB ~~technology~~issued ~~general~~Statement ~~control~~of ~~deficiencies~~Financial Accounting Standards No. 160, “Noncontrolling Interests in ~~the~~Consolidated ~~aggregate~~Financial ~~were~~Statements ~~deemed~~— An Amendment of ARB No. 51” (“FAS 160”). FAS 160 amends ARB 51 to ~~represent~~establish accounting aand ~~material~~reporting ~~weakness~~standards infor the ~~control~~noncontrolling ~~environment~~interest in a subsidiary and ~~were~~for the ~~result~~deconsolidation of a ~~lack~~subsidiary. ofIt ~~communication~~clarifies ~~and~~that ~~enforcement~~a noncontrolling ofinterest ~~control~~in ~~consciousness.~~a ~~These~~subsidiary, ~~deficiencies~~which is sometimes referred to as minority interest, is a third-party ownership interest in the ~~aggregate~~consolidated entity ~~represented~~that ~~more~~should ~~than~~be reported as a ~~remote~~component ~~likelihood~~of equity in the consolidated financial statements. Among other requirements, FAS 160 requires consolidated statement of operations to be reported at amounts that ainclude ~~material~~the ~~misstatement~~amounts attributable to both the parent and the noncontrolling interest. FAS 160 also requires disclosure, on the face of the ~~Company’s~~consolidated ~~annual~~income orstatement, ~~interim~~of ~~financial~~the amounts ~~statements~~of ~~would~~consolidated ~~not~~net ~~have~~income ~~been~~attributable ~~prevented~~to the parent and to the noncontrolling interest. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or ~~detected~~after December 15, 2008. Earlier adoption is prohibited. We are currently evaluating the potential impact of this statement.

•In March 2008, ~~Deficiencies~~the ~~related~~FASB toissued ~~logical~~Statement ~~and~~of ~~physical~~Financial ~~access~~Accounting ~~requests~~Standards No. 161, “Disclosures ~~password~~about ~~parameters~~Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133,” ~~security~~(“FAS ~~violation~~161”) ~~monitoring~~as amended and interpreted, ~~removal~~which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of ~~access~~financial ~~rights~~reporting. Disclosing ~~for~~the ~~terminated~~fair ~~employees,~~values ~~segregation~~of derivative instruments and their gains and losses in a tabular format provides a more complete picture of ~~duties~~the ~~reviews,~~location ~~employee~~in ~~acknowledgement~~an entity’s financial statements of ~~security~~both ~~policies~~the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, ~~privileged~~(b) ~~access~~how ~~rights~~derivative instruments and ~~powerful~~related hedged ~~user~~items ~~IDs~~are accounted for under Statement 133 and its related interpretations, ~~role~~and ~~based~~(c) ~~security~~how ~~profiles~~derivative instruments and related hedged items affect an entity’s financial position, financial performance, and ~~periodic~~cash ~~reviews~~flows. FAS of161 ~~user~~is ~~access~~effective ~~profiles~~for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. The Company does not expect SFAS 161 to have a material impact on its financial statements.

• Deficiencies related to configuration changes, authorization for changes, approval of testing, testing of changes prior to being placed into production, monitoring for unauthorized program changes and configuration changes, communication of changes, updates of control documentation, developer access to production, and emergency changes.Seasonality

•Historically, our ~~Deficiencies~~quarterly ~~related~~revenues tohave ~~updates~~been highest in the second and third quarters of each ~~control~~calendar ~~documentation,~~year ~~data~~because ~~migration,~~a ~~training~~large onnumber ~~new~~of ~~applications,~~orders ~~post-implementation~~for ~~review~~modular classrooms placed by school districts require that classrooms be constructed, delivered and installed ~~testing~~in ~~approach~~time for the upcoming new school year which generally commences in September. We have typically been able to add employees as needed to respond to the increases in manufacturing output required by this seasonal demand.

•Our first and ~~Deficiencies~~fourth ~~related~~quarter torevenues ~~backup~~are ~~tape~~typically ~~off-site~~lower ~~storage,~~due ~~backup~~to ~~tape~~greater ~~on-site~~number ~~storage,~~of holidays ~~monitoring~~and days of ~~backups,~~inclement ~~problem~~weather ~~management,~~during ~~periodic~~such ~~restoration~~periods. ofIn ~~backups~~addition, ~~backup~~our operating ~~tape~~margins ~~rotation~~may ~~policy,~~vary ~~backup~~on ~~tape~~a ~~log,~~quarterly ~~completion~~basis depending upon the mix of revenues ~~job~~between ~~schedules,~~standardized ~~documentation~~classrooms and higher margin customized classrooms and the timing of ~~operating~~the ~~procedures~~completion of large, ~~and~~higher ~~operations~~margin ~~reporting~~customized contracts.

• The Company’s program for monitoring the effectiveness of internal control over financial reporting, including information technology related controls, was not sufficient to provide the Company with a basis to monitor the quality of the Company’s internal control performance over time. Internal control monitoring involves assessing the design and operation of internal control on a timely basis and taking necessary corrective actions. This material weakness represented more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements would not have been prevented or detected.29

We anticipate ~~also~~that ~~have~~the ~~audited,~~impact inof ~~accordance~~seasonal ~~with~~demand ~~the~~for ~~standards~~classrooms ofwill ~~Public~~diminish due to ~~Company~~the ~~Accounting~~growing ~~Oversight Board~~impact ~~(United~~of ~~States),~~multi-year ~~the~~contracts ~~consolidated~~and ~~financial~~increased ~~statements~~sales ofoutside the traditional ~~Company~~classroom market. ~~The~~However, ~~aforementioned~~these ~~material~~factors ~~weaknesses~~will ~~were~~not ~~considered~~fully ~~in determining~~ offset the impact ~~nature,~~of ~~timing,~~inclement weather and ~~extent~~concentrations of ~~audit~~holidays. ~~tests~~So ~~applied~~although inthe impact ~~our audit~~ of ~~the~~seasonal ~~2004~~demand ~~consolidated~~is ~~financial statements,~~expected ~~and~~to ~~this~~be ~~report~~diminished, ~~does~~revenue ~~not~~and ~~affect~~margins in the ~~our~~first ~~report~~and ~~dated~~fourth ~~June~~quarters ~~16,~~will ~~2005,~~likely ~~which~~be ~~expressed~~lower anthan ~~unqualified~~in ~~opinion~~the onsecond ~~those~~and ~~consolidated financial statements~~third quarters.

InThe following ~~our~~tables ~~opinion,~~present ~~management’s~~our ~~assessment~~unaudited ~~that~~quarterly ~~Modtech~~information ~~Holdings,~~for ~~Inc.~~each ~~did not maintain effective internal control over financial reporting as~~ quarter of ~~December 31, 2004,~~ is fiscal ~~fairly~~years ~~stated~~2007, in2006 ~~all~~and ~~material~~2005 ~~respects,~~and ~~based~~reflect ~~on criteria established in Internal Control-Integrated Framework issued by~~ the ~~Committee~~seasonality of ~~Sponsoring~~our ~~Organizations of~~ business. In the ~~Treadway~~opinion ~~Commission~~of ~~(COSO). Also~~management, inall ~~our~~necessary ~~opinion~~adjustments, ~~because~~which ofconsist ~~the~~only ~~effect~~ of ~~the~~ normal ~~material~~and ~~weaknesses~~recurring ~~described~~accruals, ~~above~~have onbeen ~~the~~included ~~achievement~~to offairly ~~the~~present ~~objectives of~~ the unaudited ~~control~~quarterly ~~criteria,~~results. ~~the~~This ~~Company~~data ~~has~~should ~~not~~be ~~maintained~~read ~~effective~~together ~~internal~~with ~~control~~the consolidated ~~over~~ financial ~~reporting~~statements asand ofthe ~~December~~notes ~~31,~~thereto ~~2004,~~included ~~based on criteria established~~ elsewhere in ~~Internal~~ this ~~Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)~~report.

/s/ KPMG LLP

2007:	Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales	$	13,975,000		$	21,817,000		$	24,031,000		$	27,500,000
Gross (loss) profit		(5,253,000	)		(1,207,000	)		(529,000	)		1,089,000
Net (loss) income		(9,345,000	)		(5,163,000	)		(42,928,000	)		528,000
(Loss) earnings per common share:
Basic and diluted	$	(0.44	)	$	(0.24	)	$	(2.00	)	$	0.02

Costa Mesa, California

2006:	Fourth Quarter			Third Quarter		Second Quarter			First Quarter
Net sales	$	29,239,000		$	45,583,000	$	44,307,000		$	36,904,000
Gross (loss) profit		(3,692,000	)		2,915,000		2,868,000			2,287,000
Net (loss) income		(50,996,000	)		503,000		(297,000	)		(3,901,000	)
(Loss) earnings per common share:
Basic and diluted	$	(2.59	)	$	0.03	$	(0.02	)	$	(0.23	)

~~June 16, 2005~~ Inflation

~~ITEM 9B~~We are subject to the effects of changing prices. ~~OTHER~~ ~~INFORMATION~~During the years ended December 31, 2007, 2006 and 2005, there was no significant inflationary impact, but during 2004 we realized dramatic increases in the price of certain commodities used in the production of our products, in particular steel, dimensional lumber and plywood products. Many of our contracts at the time did not allow us to pass these costs on to our customers. While the cost outlook for these and other commodities used in our production is not certain, management believes it can manage these inflationary pressures with sales price adjustments that are allowed by our newer contracts and by actively pursuing internal cost reduction efforts, including improved supply chain and inventory management.

~~There was no information we were required to disclose in a report on Form 8-K during the~~ITEM ~~fourth~~ 7A. ~~quarter~~QUANTITATIVE ~~2004~~AND ~~that~~QUALITATIVE ~~was~~DISCLOSURES ~~not~~ABOUT ~~disclosed.~~ MARKET RISK

31Market risk refers to the risk that a change in the level of one or more market factors such as interest rates, foreign currency exchange rates, or equity prices will result in losses for a certain financial instrument or group of instruments. We are exposed to the risk of increased interest rates on our current debt instruments and the risk of loss on credit extended to our customers. We have issued equity instruments, including warrants and a convertible note which contain certain derivatives which fluctuate, primarily as a result of changes in our stock price.

~~Table~~Interest Rate ~~of Contents~~Risk

~~PART~~We are exposed ~~III~~to the risk of fluctuation in interest rates on our debt instruments. During 2007, we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. Our outstanding debt instruments with Laurus Master Fund, Ltd. bear interest at adjustable rates equal to the prime rate as published in the Wall Street Journal, plus 2.5% and 3.75%, respectively. The debt outstanding under these notes entering 2008 is $14.4 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of approximately $140,000 per annum.

~~ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT~~ 30

~~(a) Board of Directors~~ Credit Risk

Our credit ~~current~~terms ~~directors~~generally are as“net ~~follows:~~30” for dealer accounts and defined by contracts which vary for direct sales. We actively monitor the risk of loss through a variety of control procedures involving senior management. Historically, credit losses have been less than 1.0% of sales and within our expectations.

~~David M. Buckley, age 40, joined the Company in September 2004 as President and Chief Executive Officer. Prior to joining Modtech, for most of the past six years (from~~Derivative ~~1998~~ Liability to 1999 and from 2001 through 2004) Mr. Buckley held senior executive and management positions at various divisions and subsidiaries of General Electric Company (“GE”) and GE Capital where he was responsible for generating sales growth and raising productivity and profitability by reducing product cycle-times, increasing inventory turns, and improving operational efficiencies. During 2000 through 2001, he was the President and Chief Executive Officer of TIMM Communications, Inc., a technology start-up business in the transportation marketplace. Prior to joining GE, Mr. Buckley was a Senior Manager and Principal Consultant for Price Waterhouse LLP (now known as PricewaterhouseCoopers) from 1995 to 1998 and a General Manager at Palmer Incorporated from 1992 to 1995. He has an MBA from the Wharton School of Business and a Bachelor of Science from the United States Naval Academy. Risk

~~Robert~~We are exposed W.to ~~Campbell,~~the ~~age~~risk ~~48,~~of ~~who~~fair ~~was~~value ~~elected~~derivative liability related to ~~the~~outstanding warrants. ~~Board~~The offair ~~Directors~~value of ~~Modtech,~~these ~~Inc.~~derivative liabilities is primarily determined by fluctuations in ~~1991,~~our isstock price. As our stock price increases or decreases, the ~~Managing~~fair ~~Director~~value of ~~Corporate~~these derivative liabilities increase or decrease, resulting ~~Finance~~ in ata B.corresponding ~~Riley~~current &period ~~Co.~~loss ~~Inc~~or gain to be recognized. ~~From~~Based ~~1993~~on tothe number ~~1995~~of outstanding warrants, ~~Mr.~~market ~~Campbell~~interest ~~was~~rates ~~Senior~~and ~~Vice~~historical ~~President-Investment~~volatility of ~~Banking~~our atstock ~~Baraban~~price ~~Securities~~as of December 31, ~~Incorporated~~2007, a $1 decrease or increase in our stock price results in a non-cash derivative gain or loss of approximately $0.5 ~~From~~million ~~1982~~and to$1.0 ~~1993~~million, Mrrespectively. ~~Campbell~~During ~~was~~2007, ~~employed~~2006 byand ~~the~~2005, ~~Seidler~~we experienced ~~Companies~~a $7.7 million non-cash gain, ~~Inc~~a $7.0 asmillion ~~Senior~~non-cash ~~Vice~~gain and ~~President~~ a $5.8 million non-~~Corporate~~cash ~~Finance.~~loss, respectively, on warrant and convertible note embedded derivatives.

~~Daniel J. Donahoe III, age 71, who was elected to~~ITEM ~~the Board of Directors of Modtech, Inc~~ 8. inFINANCIAL ~~1998,~~STATEMENTS isAND ~~co-founder~~SUPPLEMENTARY and President of Red Rock Resorts, which operates special, unique boutique resorts in the Western United States. He also serves as Chairman of Daybreak Investments, a privately-held investment company. Mr. Donahoe has been actively involved in the commercial and residential real estate market in the southwest over the past 30 years. DATA

~~Stanley~~The consolidated N.financial ~~Gaines,~~statements ~~age 70, has been a director~~ of the Company, ~~since~~along ~~August~~with ~~2000. Mr. Gaines served as~~ the ~~Chairman~~notes thereto and ~~CEO~~the Report of ~~GNB~~Independent ~~Incorporated~~Registered ~~from~~Public ~~1982~~Accounting toFirm ~~1988. He was~~thereon, ~~Sr.~~ required ~~Vice~~to ~~President~~be ~~International~~filed ~~from~~in ~~1981~~response ~~through~~to ~~1983~~this ~~and~~Item ~~Group~~8 ~~Vice~~are ~~President,~~attached ~~Batteries~~hereto ~~from~~as ~~1971~~exhibits under ~~through~~Item ~~1981 for Gould Incorporated~~15. ~~Mr. Gaines serves on the Board of Directors of Students in Free Enterprise.~~

~~Charles R. Gwirtsman, age 51, has been a director of the Company since February 1999. He is~~ITEM ~~Managing Director of KRG Capital Partners, LLC, a middle-market private equity firm~~ 9. ~~Prior~~CHANGES toIN ~~joining~~AND ~~KRG~~DISAGREEMENTS ~~Capital~~WITH inACCOUNTANTS ~~1996,~~ON ~~Mr.~~ACCOUNTING ~~Gwirtsman~~AND ~~served as Senior Vice President of FCM Fiduciary Capital Management Company, the manager of two mezzanine debt~~FINANCIAL funds, from January 1994 to June 1996. Prior to this, Mr. Gwirtsman was employed as a Corporate Vice President at PaineWebber, Incorporated from 1988 to 1993 as a member of the Private Finance Group. Mr. Gwirtsman serves on the Board of Directors of Cuisine Solutions and a number of privately held companies. DISCLOSURE

~~Charles C~~None. McGettigan, age 60, serves as Chairman of the Board and has been a director of Modtech, Inc. since June 1994. Mr. McGettigan is a co-founder and managing director of the investment banking firm of McGettigan, Wick & Co., Inc. and a co-founder and general partner of Proactive Investment Managers, L.P., the general partner of Proactive Partners, L.P., a merchant banking fund. Prior to founding McGettigan, Wick & Co., Inc., he was a Principal, Corporate Finance, of Hambrecht & Quist and a Senior Vice President of Dillon, Read & Co. Mr. McGettigan currently is a director of Cuisine Solutions, Inc., Onsite Energy, PMR Corporation, Sonex Research Corporation and Tanknology-NDE.

~~Myron A. Wick III, age 61, became a director of Modtech, Inc. in June 1994. Mr. Wick is~~ITEM ~~currently a managing director and co-founder of McGettigan, Wick & Co~~ 9A., ~~Inc.,~~CONTROLS anAND ~~investment banking firm formed in 1988, and a~~ PROCEDURES

32(a) Evaluation of Disclosure Controls and Procedures

~~Table~~As of the end of ~~Contents~~the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, and because of the material weaknesses discussed below, our Chief Executive Officer and Chief Financial Officer concluded that, as of the December 31, 2007, our disclosure controls and procedures were not effective in ensuring that the information required to be filed or submitted under the Exchange Act is recorded, processed, summarized and reported as specified in the Securities and Exchange Commission’s rules and forms, and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We believe, however, that the accompanying consolidated financial statements presented in this Annual Report of Form 10-K fairly present the financial condition and results of operations for the fiscal years indicated.

(b) ~~general~~ Management’s ~~partner~~Annual ofReport ~~Proactive~~on ~~Investment~~Internal ~~Managers,~~Control ~~L.P.,~~over ~~the general partner of Proactive Partners, L.P., a merchant banking fund formed in 1991. Mr. Wick is~~Financial ~~a director of Sonex Research Corporation, Story First Communications, Citizens Communications and Tanknology-NDE.~~ Reporting

Our management ~~directors~~is ~~are~~responsible ~~elected~~for ~~annually~~establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to ~~serve~~provide reasonable ~~until~~assurance regarding the ~~next~~reliability ~~annual~~of ~~meeting~~financial reporting and the preparation of ~~shareholders,~~financial orstatements ~~until~~for ~~their~~external ~~successors~~purposes ~~are~~in ~~duly~~accordance ~~elected~~with U.S. ~~and~~generally ~~qualified~~accepted accounting principles.

~~There~~All internal iscontrol systems, no ~~family~~matter ~~relationship~~how ~~between~~well ~~any~~designed, ~~director~~have ~~and any other director or executive~~inherent ~~officer of the Company~~ limitations. ~~There~~Therefore, ~~are~~even nothose ~~arrangements~~systems orthat ~~understandings~~are ~~between~~determined ~~any director and any other person(s) pursuant~~ to ~~which he was or is to~~ be ~~selected~~effective can aprovide ~~director.~~only ~~The~~reasonable ~~Board~~assurance ofas ~~Directors~~to ~~has~~the ~~determined~~adequacy ~~that~~and ~~Robert~~accuracy ~~W. Campbell, Daniel J.~~of ~~Donahoe~~ financial ~~III,~~statement ~~Stanley~~preparation ~~N. Gaines~~ and ~~Charles R~~presentation. ~~Gwirtsman are “independent” as defined in the Nasdaq listing standards.~~

~~The~~As defined ~~members~~by of the Public Company’s ~~Audit~~Accounting ~~Committee~~Oversight ~~are~~Board ~~Robert~~(“PCAOB”) Win Auditing Standard No. ~~Campbell~~5, ~~Stanley~~an N.internal ~~Gaines~~control ~~and~~material ~~Charles~~weakness R.is ~~Gwirtsman.~~a ~~The~~deficiency, ~~Board~~or combination of ~~Directors~~deficiencies, ~~has~~in ~~determined~~internal control over financial reporting, such that ~~Robert~~there is a reasonable possibility that a material misstatement of the ~~Campbell~~ annual or interim financial statements of a company will not be prevented or detected on a timely basis. An internal control significant deficiency is ana deficiency, ~~“audit~~or ~~committee~~combination of deficiencies in internal control over financial reporting ~~expert”~~that asis ~~defined~~less ~~under~~severe ~~applicable~~than ~~Securities~~a ~~and~~material ~~Exchange~~weakness, ~~Commission~~yet ~~rules~~important enough to merit attention by those responsible for oversight of the company’s financial reporting.

~~(b) Executive Officers~~ 31

~~The~~Our management, ~~executive~~under ~~officers~~the supervision of ~~the~~and ~~Company~~with ~~are~~the ~~David~~participation M.of ~~Buckley,~~our ~~President~~Chief Executive Officer and Chief ~~Executive~~Financial Officer, ~~Dennis~~evaluated L.and ~~Shogren,~~assessed ~~Senior~~the effectiveness ~~Vice President~~ of ~~Finance~~our ~~and~~internal ~~Chief~~control ~~Financial~~over ~~Officer~~financial ~~and~~reporting ~~Ronald~~as C.of ~~Savona~~December 31, ~~Senior~~2007, ~~Vice President~~based ofupon ~~Operations~~the ~~and~~framework ~~Chief~~in ~~Operating~~Internal ~~Officer.~~Control ~~Mr.~~- ~~Buckley~~Integrated isFramework issued by the ~~only~~Committee ~~director~~of ~~employed~~Sponsoring byOrganizations of the ~~Company~~Treadway Commission (COSO). ~~The~~This ~~business~~evaluation ~~experience~~and ofassessment ~~Mr.~~led ~~Buckley~~to isthe ~~set~~identification ~~forth~~of ~~above~~material weaknesses ~~under~~in ~~the~~our ~~heading~~internal ~~“Board~~control ofover ~~Directors”~~financial reporting.

~~Mr.~~The identified ~~Shogren,~~material ~~age~~weaknesses ~~51, joined Modtech~~ in ~~June~~our ~~2003~~internal ascontrol ~~its~~over ~~Chief~~financial ~~Financial Officer. Prior to~~reporting ~~joining~~ relate ~~the Company, Mr. Shogren held senior level positions at Haskel International from 2001~~ to 2003 and for Ameron International from 1997 to 2001, where he was responsible for corporate finance and reporting, manufacturing, engineering and support functions, with additional emphasis on lean manufacturing improvements. He holds an MBA degree from the ~~University~~following ~~of Rochester’s William E. Simon Graduate School of Business Administration and a Bachelor of Science degree in accounting from the State University of New York at Brockport.~~ matters:

~~Mr.~~· ~~Savona,~~We ~~age~~lack ~~53, joined~~ the ~~Company~~necessary indepth ~~January~~of ~~2003~~personnel aswith ~~Director~~sufficient oftechnical ~~Marketing~~accounting ~~and~~expertise ~~promoted~~ to ~~Chief~~ensure ~~Operating~~that ~~Officer in October 2004. Mr. Savona has more than 30 years of experience in top management positions in~~ the ~~modular~~preparation ~~building and construction industry. From 2000 through 2002, Mr. Savona was Chief Executive Officer~~ of ~~Eco~~interim Building Systems, Inc., a manufacturer of modular buildings utilizing a patented glass fiber reinforced concrete wall system. While the CEO of Eco Building Systems, Inc., Mr. Savona was primarily responsible for the manufacturing operations and ~~growth~~annual offinancial ~~the~~statements ~~company.~~are ~~During~~without ~~2002,~~material ~~an involuntary petition for reorganization was filed against Eco Building Systems, Inc~~misstatements. ~~under Chapter 11 of the Bankruptcy Code. Mr. Savona left Eco Building Systems, Inc. in December of 2002. He is a graduate of the UCLA executive management program.~~

~~Subject~~· toOur ~~the~~procedures ~~terms~~associated ofwith ~~applicable~~accounting ~~employment~~for ~~agreements,~~our ~~officers~~long-term ~~serve~~revenue atcontracts ~~the~~continue ~~pleasure~~to ofbe ~~the~~insufficient ~~Board~~to ofensure ~~Directors.~~that ~~There~~revenue ~~are no arrangements or understandings by or between any executive officer~~ and ~~any~~costs ~~other person(s)~~are ~~pursuant~~properly toreflected ~~which~~in heour ~~was~~consolidated orfinancial ~~is to be selected as an officer of the Company~~statements.

~~(c)~~Because of ~~Section~~the ~~16(a)~~material ~~Beneficial~~weaknesses ~~Ownership~~described ~~Reporting~~above, ~~Compliance~~our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2007, our internal control over financial reporting was not effective based on the criteria in Internal Control - Integrated Framework issued by the COSO.

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers and directors and persons who own more than ten percent of a registered class of the Company’s equityOur securities, to file reports of ownership and changes in ownership (Forms 3, 4 and 5) with the Securities and Exchange Commission and to furnish the Company with copies of all such forms which they file. To the Company’s knowledge, based solely plan ~~on the Company’s review of such reports or written representations from certain reporting persons that no Forms 5 were required~~ to beremediate ~~filed by~~ those ~~persons,~~material ~~the~~weakness ~~Company~~remaining ~~has~~as ~~determined~~of ~~that~~December ~~David Buckley~~31, ~~Dennis~~2007 ~~Shogren~~is ~~and Ron Savona were each~~as ~~inadvertently late in making their Form 3 filings.~~ follows:

33· We plan to either hire additional staff for our operational finance teams or utilize outside consulting resources for further documentation, testing and monitoring of key controls.

~~Table~~· ofWe ~~Contents~~are currently re-evaluating all finance personnel to ensure that appropriate skills and training are maintained in all critical positions.

~~(d)~~This annual ~~Code~~report does not include an attestation report of ~~Conduct~~our ~~and~~registered ~~Ethics~~public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

~~The Company has adopted a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees. This code is~~(c) ~~publicly~~ Changes ~~available~~in onInternal ~~the~~Control ~~Company~~over ~~website~~Financial ~~at www.modtech.com.~~ Reporting

~~ITEM 11. EXECUTIVE~~There were ~~COMPENSATION~~no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2007, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

~~(a)~~ITEM 9B. ~~Director~~OTHER ~~Compensation~~ INFORMATION

Each non-employee director, other than the Chairman of the Board, is paid an annual retainer of $10,000 plus $1,000 for each board and board committee meeting attended and $1,000 for each committee they chair. The Chairman of the Board is paid $10,000 per month plus $1,000 for each board meeting. Each non-employee director is granted an option to purchase 20,000 shares of Common Stock every 4 years, with 25% vesting over a 4-year period of service on the Board of Directors. The Company reimburses the expenses of its non-employee directors in attending Board meetings. If a director is also an employee of the Company, no compensation is paid for any services provided as a director. None

~~(b) Compensation of Executive Officers~~ 32

~~The following table summarizes the annual and long term compensation paid by the Company during fiscal years ended December 31, 2004, 2003 and 2002 to those persons who~~PART were (i) the Chief Executive Officer during the last fiscal year and (ii) each additional executive officer at the end of the last fiscal year whose total compensation exceeded $100,000 during the year ended December 31, 2004 III.

~~Summary~~ITEM 10. ~~Compensation~~DIRECTORS, ~~Table~~EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

					Long-Term Compensation
	Annual Compensation				Awards		Payouts
Name and Principal Position	Year	Salary $	Bonus $	Other Annual Compensation $	Restricted Stock Awards $	Securities Underlying Options/SARS #	LTIP Payouts	All Other Compensation $(1)
David M. Buckley President, Chief Executive Officer and Director (2)	2004	98,192	150,000	1,710	—	100,000	—	—
Dennis L. Shogren SVP and Chief Financial Officer (3)	20042003	160,76983,654	6,2346,234	5,400—	— —	72,29525,000	— —	— —
Ronald C. Savona SVP and Chief Operating Officer (4)	2004	186,731	—	6,000	—	50,000	—	—
Evan M. Gruber Chief Executive Officer (5)	200420032002	311,562465,000440,000	72,83855,219167,086	739,850— —	— — —	69,11459,99466,667	— — —	6,0006,0005,750
Charles C. McGettigan Interim Chief Executive Officer (6)	2004	—	—	120,000	—	—	—	—

The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders’ to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

~~(1)~~ITEM 11. ~~The~~EXECUTIVE ~~figures shown in the column designated “All Other Compensation” represent the executive officer’s share of the Company’s contribution to the 401(k) plan, see “401(k) Plan.”~~COMPENSATION

~~(2)~~The information ~~Mr.~~required ~~Buckley~~by ~~joined~~this item is incorporated herein by reference from the definitive ~~Company~~proxy instatement ~~2004~~for our next annual stockholders’ to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

34ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

~~Table~~The information required by this item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders’ to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120 days after the end of ~~Contents~~our most recently completed fiscal year.

~~(3) Mr~~ITEM 13. ~~Shogren~~CERTAIN ~~joined~~RELATIONSHIPS ~~the~~AND ~~Company~~RELATED inTRANSACTIONS, ~~2003.~~AND DIRECTOR INDEPENDENCE

~~(4)~~The information ~~Mr.~~required ~~Savona~~by ~~was~~this ~~promoted~~item is incorporated herein by reference from the definitive proxy statement for our next annual stockholders’ to ~~Chief~~be ~~Operating~~filed ~~Officer~~with the inCommission ~~2004~~pursuant to Regulation 14A under the Exchange Act within 120 days after the end of our most recently completed fiscal year.

~~(5) Mr~~ITEM 14. ~~Gruber~~PRINCIPAL ~~discontinued~~ACCOUNTANT ~~employment~~FEES ~~with~~AND ~~the Company in 2004. Other annual compensation in 2004 includes $736,250 in severance pay.~~SERVICES

~~(6)~~The information ~~Mr.~~required ~~McGettigan~~by isthis aitem ~~non-employee~~is ~~director~~incorporated ~~and~~herein ~~served~~by asreference ~~interim~~from the definitive ~~Chief~~proxy ~~Executive~~statement ~~Officer~~for ~~from~~our ~~August~~next ~~2004~~annual stockholders’ to ~~September~~be ~~2004.~~filed ~~Other~~with the ~~annual~~Commission ~~compensation~~pursuant ~~includes~~to ~~$10,000~~Regulation ~~paid~~14A ~~per~~under ~~month~~the ~~for~~Exchange ~~2004~~Act towithin ~~Mr.~~120 days after ~~McGettigan~~the asend ~~Chairman~~ of ~~the~~our ~~Board~~most recently completed fiscal year.

~~(c) Employment Agreement~~ 33

~~We entered into an employment agreement in September~~PART 2004 with Mr. Buckley. This agreement expires in December 2006. It provides for early severance payments of between 12 and 18 months salary and includes, among other provisions, a base annual salary of not less than $345,000. Mr. Buckley is entitled to earn bonuses ranging from 68% to 158% of annual base salary, based on meeting certain performance targets. Mr. Buckley has the discretion to receive up to one-half (but no less than 25%) of the aggregate bonus earned in a given year in cash, with the remainder to be paid in stock options. IV

~~We entered into an employment~~ITEM ~~agreement in December 2003 with Mr~~ 15. ~~Gruber.~~EXHIBITS ~~This~~AND ~~agreement~~FINANCIAL ~~provided~~STATEMENT a base annual salary of $465,000 and included, among other provisions, early severance payments of between one and two years salary. Mr. Gruber was also entitled to earn bonuses of up to 100% of annual base salary based on performance. This agreement was terminated on August 7, 2004 upon Mr. Gruber’s discontinuation of employment with us. SCHEDULES

(da) Exhibits ~~401(k)~~and ~~Plan~~Financial Statement Schedules

Under our 401(k) Plan, our officers and other employees may elect to defer up to 12% of their compensation, subject to limitations under the Internal Revenue Code. We make contributions on a 50% matching basis. Amounts deferred are deposited by us in a trust account for distribution to employees upon retirement, attainment of age 59 1/ & 2~~, permanent disability, death, termination of employment or the occurrence of conditions constituting extraordinary hardship~~. ~~For~~Index ~~the year ended December 31, 2004, the Company contributed $6,000 as matching contributions~~ to ~~the~~Financial ~~account~~Statements ~~of Mr. Gruber.~~

~~(e)~~The following ~~Equity~~financial ~~Compensation~~statements ~~Plan~~and ~~Information~~financial statement schedule of the Company, along with the notes thereto and the Report of Independent Registered Public Accounting Firm, are filed herewith, as required by Part II, Item 8 hereof.

~~Refer to Item 5 for~~Financial ~~equity~~ Statements ~~compensation plan information.~~

The following table sets forth certain information regarding options granted by us during the year ended December 31, 2004 to the executive officers identified in the Summary Compensation Table set forth above:

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets – December 31, 2007 and 2006	F-3

Consolidated Statements of Operations – Years Ended December 31, 2007, 2006 and 2005	F-4

Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2007, 2006 and 2005	F-5

Consolidated Statements of Cash Flows – Years Ended December 31, 2007, 2006 and 2005	F-6

Notes to Consolidated Financial Statements	F-7

Schedule II – Valuation and Qualifying Accounts	F-32

~~Options~~All other financial ~~Granted~~statement schedules have been omitted because the required information is shown in ~~Fiscal~~the ~~Year~~consolidated ~~2004~~financial statements or notes thereto, the amounts involved are not significant, or the schedules are not applicable.

	No. of Shares Subject to Options Granted (1)	% of Total Options Granted to Employees		Exercise Price (2)		Expiration Date	Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation For Option Term (3)
Name of Optionee							5%		10%
David M. Buckley	100,000	21	%	$	7.53	09/07/2014	$	473,558	$	1,200,088
Dennis L. Shogren	22,29550,000	511	%%	$$	8.417.25	01/01/201409/29/2014	$$	117,918227,974	$$	298,828 577,732
Ronald C. Savona	50,000	11	%	$	7.25	09/29/2014	$	227,974	$	577,732
Evan M. Gruber	69,114	15	%	$	8.41	01/01/2014	$	365,544	$	926,361
Charles C. McGettigan	—	—	%	$	—	—	$	—	$	—

3. Exhibits

Exhibit
Number		Name of Exhibit

3.1(1)		Certificate of Incorporation of the Company.

3.2(1.1)		Bylaws of the Company.

3.3		Certificate of Amendment of Certificate of Incorporation

4.1		Certificate of Designation of Preferences

4.2		Amended and Restated Certificate of Designation of Preferences

10.1(2)		Company’s 1994 Stock Option Plan.

10.2(2)		Company’s 1996 Stock Option Plan.

10.3(2)		Company’s 1999 Stock Option Plan.

10.4(2)		Company’s 2002 Stock Option Plan.

10.5(3)		Employment Agreement between the Company and Dennis L. Shogren.

10.6(3.1)		Employment Agreement between the Company and Ronald Savona.

10.7(3.2)		Employment Agreement between the Company and Kenneth S. Cragun.

10.8(2)		Separation Agreement between the Company and Evan M. Gruber.

~~Table of Contents~~34

(1) Options are exercisable starting 12 months after the grant date with 25% vesting each year. Options are for a period of 10 years, but are subject to earlier termination in connection with the termination of employment.

Exhibit
Number		Name of Exhibit

10.9(2)		Separation Agreement between the Company and Michael G. Rhodes.

10.10(2)		Employment Agreement between the Company and David M. Buckley

10.11(4)		Lease between the Company and Pacific Continental Modular Enterprises, relating to the Barrett property in Perris, California

10.12(4)		Lease between the Company and BMG, relating to the property in Lathrop, California

10.13(5)		Conversion and Repurchase Agreement, dated October 31, 2006

10.14(6)		Securities Purchase Agreement, dated December 31, 2004

10.15(6)		Senior Subordinated Secured Convertible Note, dated December 31, 2004

10.16(6)		Warrant to Purchase Common Stock issued December 31, 2004

10.17(6)		Registration Rights Agreement, dated December 31, 2004

10.18(6)		Pledge and Security Agreement, dated December 31, 2004

10.19(6)		Intercreditor Agreement, dated December 31, 2004

10.20(6)		Amendment and Forbearance Agreement among the Company, Wells Fargo Bank, N.A., Union Bank of California, N.A. and Comerica Bank California, dated December 29, 2004.

10.21(7)		Financing Agreement between the Company and Fortress Credit Corp. as administrative agent, dated February 25, 2005.

10.22(8)		Amendment Number 1 to Industrial Real Estate Lease between Modtech Holdings, Inc. and BMG2 Enterprises, dated July 29, 2005

10.23(8)		Sublease between Modtech Holdings, Inc. and Boise Building Solutions Distribution, L.L.C., dated July 29, 2005

10.24(9)		Securities Purchase Agreement with Peninsula Fund, L.P. and others, dated August 5, 2005

10.25(9)		First Amendment and Waiver of Financing Agreement between Fortress and Modtech Holdings, Inc., dated August 5, 2005

10.26(9)		First Amendment and Restated Registration Rights Agreement, dated August 5, 2005

10.27(9)		Amended and Restated Senior Subordinated Secured Convertible Note, dated August 5, 2005

10.28(9)		Consent, Waiver, Amendment and Exchange Agreement, dated August 5, 2005 (“Waiver”)

10.29(9)		Form of Voting Agreement executed pursuant to Waiver

10.30(9)		Form of Lock Up Letter executed pursuant to the Securities Purchase Agreement, dated August 5, 2005

10.31(9)		Form of Warrant issued pursuant to the Securities Purchase Agreement, dated August 5, 2005

10.32(9)		Warrant for 8,276 shares of common stock, dated August 5, 2005

10.33(10)		Second Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated September 19, 2005

~~(2) The exercise price is the market price of a share of our Common Stock on the date of grant.~~35

(3) On December 31, 2004, the closing price for a share of our Common Stock was $7.87.

Exhibit
Number		Name of Exhibit

10.34(11)		Third Amendment of Financing Agreement between Fortress and Modtech Holdings, Inc., dated December 22, 2005

10.35(12)		Intercreditor Agreement with Bank of America, N.A., dated, March 31, 2006

10.36(12)		Loan and Security Agreement with Bank of America, N.A., dated March 31, 2006

10.37(12)		Amendment Agreement, dated March 31, 2006

10.38(13)		Amendment to 2002 Stock Option Plan, dated June 13, 2006

10.39(14)		Exchange of Senior Subordinated Secured Convertible Notes, dated May 3, 2006

10.40(15)		Securities Purchase Agreement with Laurus Master Fund, Ltd. (and attached exhibits), dated October 21, 2006

10.41(15)		Intellectual Property Security Agreement, dated October 31, 2006

10.42(15)		Master Security Agreement with Laurus Master Fund, Ltd., dated October 31, 2006

10.43(15)		Registration Rights Agreement with Laurus Master Fund, Ltd., dated October 31, 2006

10.44(15)		Sale and Purchase Agreement and Joint Escrow Instructions with NL Ventures V, L.P. dated November 1, 2006

10.45(15)		Lease Agreement with NL Ventures V Plant City, L.P. dated November 1, 2006

10.46(16)		Registration Rights Agreement with Amphora Limited, dated October 31, 2006

10.47(16)		Conversion and Repurchase Agreement, dated October 31, 2006

10.48(17)		Amendment and Waiver Agreement with Laurus Master Fund, Ltd., dated December 28, 2006

10.49(17)		Securities Purchase Agreement with Laurus Master Fund, Ltd., dated December 28, 2006

10.50(17)		Secured Term Note issued to Laurus Master Fund, Ltd., dated December 28, 2006

10.51(17)		Common Stock Purchase Warrant issued to Laurus Master Fund, Ltd., dated December 28, 2006

10.52(17)		Amended and Restated Registration Rights Agreement with Laurus Master Fund, Ltd., dated December 28, 2006

10.53		Amendment and Waiver Agreement with Laurus Master Fund, Ltd., Valens Offshore SPV I, Ltd. and Valens U.S. SPV I, LLC, dated February 29, 2008

10.54		Promissory Note issued to Laurus Master Fund, Ltd. in the amount of $634,414.36, dated February 29, 2008

10.55		Promissory Note issued to Valens Offshore SPV I, Ltd. in the amount of $66,602.06, dated February 29, 2008

10.56		Promissory Note issued to Valens U.S. SPV I, LLC in the amount of $48,983.58, dated February 29, 2008

10.57		Common Stock Purchase Warrant issued to Laurus Master Fund, Ltd. for up to 2,537,657 shares of stock, dated February 29, 2008

The following table sets forth information regarding options exercised during the year ended December 31, 2004 by the executive officers identified in the Summary Compensation Table set forth above, as well as the aggregate value of unexercised options held by such executive officers at December 31, 2004. We have no outstanding stock appreciation rights, either freestanding or in tandem with options. 36

Aggregated Option Exercises Last Fiscal Year and Fiscal Year End Option Values

Exhibit
Number		Name of Exhibit

10.58		Common Stock Purchase Warrant issued to Valens Offshore SPV I, Ltd. for up to 266,408 shares of stock, dated February 29, 2008

10.59		Common Stock Purchase Warrant issued to Valens U.S. SPV I, LLC for up to 195,935 shares of stock, dated February 29, 2008

10.60		Registration Rights Agreement with Laurus Master Fund, Ltd., dated February 29, 2008

10.61		Registration Rights Agreement with Valens Offshore SPV I, Ltd., dated February 29, 2008

10.62		Registration Rights Agreement with Valens U.S. SPV I, LLC, dated February 29, 2008

10.63		Reaffirmation and Ratification Agreement with Laurus Master Fund, Ltd., Valens Offshore SPV I, Ltd. and Valens U.S. SPV I, LLC, dated February 29, 2008

10.64		Lock-Up Letter Agreement with Laurus Master Fund, Ltd., Valens Offshore SPV I, Ltd. and Valens U.S. SPV I, LLC, dated February 29, 2008

10.65		Subscription Agreement with the "Buyers" (as defined therein), dated March 10, 2008

10.66		Registration Rights Agreement with the Buyers as described in Exhibit 10.63 above, dated March 10, 2008

10.67		Amended and Restated Common Stock Purchase Warrant issued to Laurus Master Fund, Ltd. for up to 2,537,657 shares of stock, dated March 21, 2008

10.68		Amended and Restated Common Stock Purchase Warrant issued to Valens Offshore SPV I, Ltd. for up to 266,408 shares of stock, dated March 21, 2008

10.69		Amended and Restated Common Stock Purchase Warrant issued to Valens U.S. SPV I, LLC for up to 195,935 shares of stock, dated March 21, 2008

23.1		Consent of Independent Registered Public Accounting Firm - Squar, Milner, Peterson, Miranda & Williamson, LLP

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Shares Acquired on Exercise (#)	Value Realized		Number of Unexercised Options at Fiscal Year End(#)		Value of Unexercised in-the-money Options at Fiscal Year End ($) (1)
Name				Exercisable	Unexercisable	Exercisable		Unexercisable
David M. Buckley	—		—	—	100,000		—	$	34,000
Dennis L. Shogren	—		—	11,824	85,471		—	$	31,000
Ronald C. Savona	—		—	25,000	125,000		—	$	31,000
Evan M. Gruber	540,466	$	1,655,207	454,110	—		—		—
Charles C. McGettigan	—		—	47,066	10,000	$	56,810		—

________________________

(1) Calculated based on the closing price of our Common Stock as reported on the NASDAQ National Market System on December 31, 2004, which was $7.87 per share.

(1)	Incorporated by reference to Modtech Holdings, Inc.’s Registration Statement on Form S-4 filed with the Commission on October 27, 1998 (Commission File No. 333-69033).

(1.1)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-K filed with the Commission on March 15, 2004 (Commission File No. 000-25161).

(2)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the Commission on November 12, 2004 (Commission File No. 000-25161).

(3)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on September 22, 2006 (Commission File No. 000-25161).

~~(f) Compensation Committee Interlocks and Insider Participation~~ 37

The members of the Compensation Committee during the fiscal year ended December 31, 2004 were Charles R. Gwirtsman, Charles C. McGettigan and Myron A. Wick III. Neither Mr. Gwirtsman nor Mr. Wick has ever been an officer or employee of ours or any of our subsidiaries. As stated above, Mr. McGettigan served as the interim Chief Executive Officer from August 2004 to September 2004. None of the executive officers served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire Board of Directors) of another entity during 2004.

(3.1)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on February 13, 2006 (Commission File No. 000-25161).

(3.2)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on June 25, 2007 (Commission File No. 000-25161).

(4)	Incorporated by reference to Modtech, Inc.’s Registration Statement on Form S-1 filed with the Commission on June 6, 1990 (Commission File No. 033-35239).

(5)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on November 1, 2002 (Commission File No. 000-25161).

(6)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on January 3, 2005 (Commission File No. 000-25161).

(7)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on March 2, 2005 (Commission File No. 000-25161).

(8)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q/A filed with the Commission on October 17, 2005 (Commission File No. 000-25161).

(9)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on August 9, 2005 (Commission File No. 000-25161).

(10)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on September 23, 2005 (Commission File No. 000-25161).

(11)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on December 29, 2005 (Commission File No. 000-25161).

(12)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-K filed with the Commission on April 4, 2006 (Commission File No. 000-25161).

(13)	Incorporated by reference to Modtech Holdings, Inc.’s Definitive Proxy Statement filed with the Commission on May 5, 2006 (Commission File No. 000-25161).

(14)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the Commission on August 14, 2006 (Commission File No. 000-25161).

(15)	Incorporated by reference to Modtech Holdings, Inc.’s Form 10-Q filed with the Commission on November 14, 2006.

(16)	Incorporated by reference to Modtech Holdings, Inc.’s Form 8-K filed with the Commission on November 1, 2006 (Commission File No. 000-25161).

(17)	Incorporated by reference to Modtech Holdings, Inc. Form 8-K filed with the Commission on January 4, 2007 (Commission File No. 000-25161).

~~(g) Compensation Committee Report~~ 38

It is the policy of our Compensation Committee to establish compensation levels for the executive officers, which reflect our overall performance and their performance, responsibilities and contributions to the long-term growth and profitability. The committee determines compensation of the executive officers, including the chief executive officer, based on its evaluation of our overall performance, including various quantitative factors, primarily our financial performance, sales and earnings against our operating plan, as well as various qualitative factors such as new product development, our product and service quality, the extent to which the executive officers have contributed to forming a strong management team and other factors which the committee believes are indicative of our ongoing ability to achieve our long-term growth and profit objectives. The Compensation Committee has and may continue to rely on reports from compensation consultants in this matter. SIGNATURES

~~The~~Pursuant to ~~principal component of~~ the ~~compensation~~requirements of ~~the~~Section ~~executive~~13 ~~officers is their base salaries. The committee also retains the discretion to award bonuses based on corporate~~ or ~~individual~~15(d) ~~performance.~~of ~~The committee evaluates~~ the ~~practices~~Securities ofExchange ~~various~~Act ~~industry groups~~of 1934, ~~market~~the ~~data,~~registrant ~~including~~has ~~data~~duly ~~obtained~~caused ~~from~~this ~~time~~report to ~~time~~be ~~from~~signed ~~outside~~on ~~compensation~~its ~~consultants, and other economic~~behalf ~~information to determine~~ by the ~~appropriate~~undersigned, ~~ranges~~thereunto ofduly ~~base salary~~ authorized.

			MODTECH HOLDINGS, INC.

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